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Mispricing and Lasting Arbitrage between Parallel Markets in the Czech Republic

Author

Listed:
  • Jan Hanousek

    (CERGE-EI)

  • Libor Nemecek

    (CERGE-EI)

Abstract

If co-existing parallel markets are efficient, then arbitrage will maintain a correct pricing relationship. A related question is whether two parallel emerging markets offering more or less the same securities but using different institutional designs, can behave as a single, fully integrated market. In this paper we introduce an explicit model of price convergence (with transaction costs), in which price differences are studied using levels of arbitrage activity. For the empirical analysis we use two parallel markets in the Czech Republic 97 the Prague Stock Exchange (PSE) and the RMS (over-the-counter system). In particular, we study the degree of arbitrage activity for different segments of the PSE and the evolution of arbitrage in the early history of these emerging markets. The empirical results provide evidence of market linkage for actively traded stocks. We find a significant relationship between the segment of the market to which a given firm belongs and the estimated level of arbitrage trading. Moreover, the level of arbitrage activity increases over time for all market segments, and, as the markets mature, the differences among the segments gradually disappear.

Suggested Citation

  • Jan Hanousek & Libor Nemecek, 2001. "Mispricing and Lasting Arbitrage between Parallel Markets in the Czech Republic," Finance 0012007, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0012007
    Note: Type of Document - Acrobat PDF; pages: 33 ; figures: Included
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    References listed on IDEAS

    as
    1. Jan Hanousek & Libor Nemecek, 2001. "Czech parallel capital markets: discrepancies and inefficiencies," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 45-55.
    2. Jan Hanousek & Randall K. Filer, 2000. "The Relationship Between Economic Factors and Equity Markets in Central Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(3), pages 623-638, November.
    3. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-297, May.
    4. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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    Cited by:

    1. Randall K. Filer & Jan Hanousek, 2002. "Data Watch: Research Data from Transition Economies," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 225-240, Winter.
    2. Jan Hanousek & Libor Nemecek, 2001. "Czech parallel capital markets: discrepancies and inefficiencies," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 45-55.

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    More about this item

    Keywords

    Arbitrage; Co-movements of financial markets; Emerging markets; Integration of emerging markets; Mispricing;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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