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Stock-ADR Arbitrage: Microstructure Risk

Author

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  • Mitra, Sovan
  • Raju Chinthalapati, V.L.
  • Clark, Ephraim
  • McGroarty, Frank

Abstract

This paper is the first to highlight that the stock-ADR arbitrage pair trading found by Alsayed and McGroarty (2012) is directly influenced by the market microstructure of ADRs. In Alsayed and McGroarty (2012) they are the first to demonstrate that arbitrage opportunities exist between stocks and their ADRs, through convergence pairs trading. Given that such arbitrage opportunities exist, we pose the question as to why such pair trades occur, rather than be eliminated by the law of one price? Using high frequency data over a 3 year sample period, with over 3.7 million 1-min observations, we investigate stock-ADR arbitrage pair trading.

Suggested Citation

  • Mitra, Sovan & Raju Chinthalapati, V.L. & Clark, Ephraim & McGroarty, Frank, 2019. "Stock-ADR Arbitrage: Microstructure Risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:intfin:v:63:y:2019:i:c:s1042443118304694
    DOI: 10.1016/j.intfin.2019.08.004
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