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Multi-market Trading and Arbitrage

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Author Info
Gagnon, Louis (Queen's U)
Karolyi, G. Andrew (Ohio State U)
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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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-9.

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Date of creation: Jun 2004
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Handle: RePEc:ecl:ohidic:2004-9

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F30 - International Economics - - International Finance - - - General

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aggarwal, Reena & Dahiya, Sandeep & Klapper, Leora, 2005. "American Depositary Receipts (ADR) holdings of U.S. based emerging market funds," Policy Research Working Paper Series 3538, The World Bank. [Downloadable!]
  2. Menkveld, Albert J., 2006. "Splitting orders in overlapping markets: a study of cross-listed stocks," Serie Research Memoranda 0003, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
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  3. Sebastian Auguste & Kathryn M.E. Dominguez & Herman Kamil & Linda L. Tesar, 2005. "Cross-Border Trading as a Mechanism for Implicit Capital Flight: ADRs and the Argentine Crisis," Working Papers 533, Research Seminar in International Economics, University of Michigan. [Downloadable!]
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  4. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2006. "International financial integration through the law of one price," Policy Research Working Paper Series 3897, The World Bank. [Downloadable!]
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  5. Halling, Michael & Pagano, Marco & Randl, Otto & Zechner, Josef, 2005. "Where is the Market? Evidence from Cross-Listings," CEPR Discussion Papers 4987, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Gagnon, Louis & Karolyi, G. Andrew, 2007. "Information, Trading Volume, and International Stock Return Comovements: Evidence from Cross-Listed Stocks," Working Paper Series 2006-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  7. Piotr Korczak & Kate Phylaktis, 2009. "Related Securities, Allocation of Attention and Price Discovery: Evidence from NYSE-Listed Non-U.S. Stocks," Bristol Economics Discussion Papers 09/612, Department of Economics, University of Bristol, UK. [Downloadable!]
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