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Arbitrage opportunities between NYSE and XETRA?: A comparison of simulation and high frequency data

Author

Listed:
  • Jörg Rieger

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Kirsten Rüchardt

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Bodo Vogt

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

This paper investigates both the no-arbitrage condition and the efficiency of financial markets by comparing two stock markets: the New York Stock Exchange (NYSE) and the German Exchange Electronic Trading System (XETRA). We analyze German stocks that are traded simultaneously at both exchanges using high frequency data for XETRA, the NYSE, and the foreign exchange rates. Converting Euro-prices into Dollar-prices reveals possibilities to explore the efficiency as well as arbitrage opportunities of these two stock markets using the phenomenon of stock price clustering. We see the result of differing extents of clustering on both exchanges, thus violating the no-arbitrage condition. We propose a trading strategy that exploits these differences. Furthermore, we compare our empirical findings with the results we obtain from simulating financial markets and conclude that simulations based on the no-arbitrage condition are not consistent with our empirical observations.

Suggested Citation

  • Jörg Rieger & Kirsten Rüchardt & Bodo Vogt, 2011. "Arbitrage opportunities between NYSE and XETRA?: A comparison of simulation and high frequency data," FEMM Working Papers 110005, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    • Handle: RePEc:mag:wpaper:110005
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    More about this item

    Keywords

    financial markets; simulation; no-arbitrage condition; stochastic processes;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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