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| Author: | Jong, A. de Rosenthal, L. Dijk, M.A. van |
| Title: | The risk and return of arbitrage in dual-listed companies |
| Journal: | Review of finance
2009 : VOL 13:3 p. 495-520 |
| Index terms: | investment planning prices arbitrage arbitrage pricing theory volatility trading |
| Freeterms: | DLCs |
| Language: | eng |
| Abstract: | This article evaluates investment strategies that utilize the deviations from theoretical price parity in a sample of 12 dual-listed companies (DLCs) in the period 1980-2002. It is shown that simple trading rules produce abnormal returns of up to almost 10% per annum adjusted for systematic risk, transaction costs, and margin requirements. However, arbitrageurs confront uncertainty about the horizon at which prices will converge and deviations from parity are very volatile. As a result, DLC arbitrage is characterized by substantial idiosyncratic return volatility and a high incidence of large negative returns, which are likely to impede arbitrage. |
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