Multi-market Trading and Arbitrage

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  • 1 January 2004
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      • Published in RePEc
Abstract
This study investigates the differences in the prices of shares of stocks that trade simultaneously in different markets around the world. Specifically, we compare the synchronous, intraday prices of American Depositary Receipts (ADRs) and other types of cross-listed shares in U.S. markets relative to their home-market shares on a currency-adjusted basis and examine the magnitude of the deviations from parity, their persistence and their systematic comovements with market indexes and currencies. We provide evidence of the existence of such price deviations for many of the almost 600 pairs of cross-listed shares from the 39 countries we study over the period between 1993 and 2002. For most stocks, the prices of the cross-listed shares and those of the home-market shares lie within a 20 to 85 basis point band of each other, but, for some stocks, they can range from a 66 percent premium to an 87 percent discount. We further show that returns on cross-listed stocks have significantly higher systematic comovements with U.S. market indexes and significantly lower systematic comovements with home market indexes than their equivalent home-market shares. These “excess” comovements, while related to country, industry, and firm-specific attributes that reflect institutional barriers to arbitrage, are also influenced by a number of factors that relate to informational barriers that can limit arbitrage activities. Specifically, we show that the excess comovements are strongly related to patterns of trading across markets, which we interpret as evidence consistent with recent theories of “trading-based” or “habitat-based” excess comovements.
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