IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v23y2013icp342-357.html
   My bibliography  Save this article

The proof is in the pudding: Arbitrage is possible in limited emerging markets

Author

Listed:
  • Ansotegui, Carmen
  • Bassiouny, Aliaa
  • Tooma, Eskandar

Abstract

We investigate whether arbitrage trades exist in emerging markets with trading barriers. Using two-year intraday data for 16 Argentinean and Egyptian depository receipts and their underlying stock, we find large intraday deviations from parity. We extend the standard arbitrage identification procedure to account for volumes and precise dynamic measures of trading costs, resulting in 9.81% and 15.32% of Argentinean and Egyptian matched trades identified as arbitrage opportunities, which we show, result in real profitable arbitrage trades. Arbitrage profits of USD 1.8 million from Argentinean and USD 1.2 million from Egyptian depository receipts were estimated over the sample period.

Suggested Citation

  • Ansotegui, Carmen & Bassiouny, Aliaa & Tooma, Eskandar, 2013. "The proof is in the pudding: Arbitrage is possible in limited emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 342-357.
    • Handle: RePEc:eee:intfin:v:23:y:2013:i:c:p:342-357
    DOI: 10.1016/j.intfin.2012.11.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443112000996
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2012.11.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gagnon, Louis & Andrew Karolyi, G., 2010. "Multi-market trading and arbitrage," Journal of Financial Economics, Elsevier, vol. 97(1), pages 53-80, July.
    2. Roman Kozhan & Wing Wah Tham, 2012. "Execution Risk in High-Frequency Arbitrage," Management Science, INFORMS, vol. 58(11), pages 2131-2149, November.
    3. Martín A. Rossi, 2000. "La hipótesis de eficiencia en los mercados de acciones. El caso del Mercado de Valores de Buenos Aires," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 0(1), pages 37-69, January-J.
    4. repec:bla:intfin:v:4:y:2001:i:2:p:221-55 is not listed on IDEAS
    5. Mark Mitchell & Todd Pulvino & Erik Stafford, 2002. "Limited Arbitrage in Equity Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 551-584, April.
    6. Rabinovitch, Ramon & Silva, Ana Cristina & Susmel, Raul, 2003. "Returns on ADRs and arbitrage in emerging markets," Emerging Markets Review, Elsevier, vol. 4(3), pages 225-247, September.
    7. deB. Harris, Frederick H. & McInish, Thomas H. & Shoesmith, Gary L. & Wood, Robert A., 1995. "Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 563-579, December.
    8. Junming Hsu & Hsin‐Yi Wang, 2008. "Why Do Price Spreads Between Domestic Shares And Their Adrs Vary Over Time?," Pacific Economic Review, Wiley Blackwell, vol. 13(4), pages 473-491, October.
    9. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, vol. 62(3), pages 1029-1079, June.
    10. Mr. Mauro Mecagni & Maged Sawky Sourial, 1999. "The Egyptian Stock Market: Efficiency Tests and Volatility Effects," IMF Working Papers 1999/048, International Monetary Fund.
    11. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2009. "International financial integration through the law of one price: The role of liquidity and capital controls," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 432-463, July.
    12. Auguste, Sebastian & Dominguez, Kathryn M.E. & Kamil, Herman & Tesar, Linda L., 2006. "Cross-border trading as a mechanism for implicit capital flight: ADRs and the Argentine crisis," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1259-1295, October.
    13. Kaul, Aditya & Mehrotra, Vikas, 2007. "The role of trades in price convergence: A study of dual-listed Canadian stocks," Journal of Empirical Finance, Elsevier, vol. 14(2), pages 196-219, March.
    14. Suarez, E. Dante, 2005. "Arbitrage opportunities in the depositary receipts market: Myth or reality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(5), pages 469-480, December.
    15. Ian Domowitz & Jack Glen & Ananth Madhavan, 2001. "Liquidity, Volatility and Equity Trading Costs Across Countries and Over Time," International Finance, Wiley Blackwell, vol. 4(2), pages 221-255.
    16. Rosenthal, Leonard, 1983. "An empirical test of the efficiency of the ADR market," Journal of Banking & Finance, Elsevier, vol. 7(1), pages 17-29, March.
    17. Lagoarde-Segot, Thomas & Lucey, Brian M., 2008. "Efficiency in emerging markets--Evidence from the MENA region," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 94-105, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ghadhab, Imen, 2018. "Arbitrage opportunities and liquidity: An intraday event study on cross-listed stocks," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 1-10.
    2. Dzhambova, Krastina & Tao, Ran & Yuan, Yuan, 2022. "Price leadership and asynchronous movements of multi-market listed stocks," International Review of Financial Analysis, Elsevier, vol. 79(C).
    3. Ghadhab, Imen & Hellara, Slaheddine, 2015. "The law of one price, arbitrage opportunities and price convergence: Evidence from cross-listed stocks," Journal of Multinational Financial Management, Elsevier, vol. 31(C), pages 126-145.
    4. Ghadhab, Imen, 2016. "The effect of additional foreign market presence on the trading volume of cross-listed/traded stocks," Journal of Multinational Financial Management, Elsevier, vol. 34(C), pages 18-27.
    5. Bassiouny, Aliaa & Tooma, Eskandar, 2021. "Intraday indirect arbitrage between European index ETFs," International Review of Financial Analysis, Elsevier, vol. 75(C).
    6. J. C. Arismendi-Zambrano & T. Ramos-Almeida & J. C. Reboredo & M. A. Rivera-Castro, 2020. "Identifying Statistical Arbitrage in Interest Rate Markets: A Genetic Algorithm Approach," Economics Department Working Paper Series n305-20.pdf, Department of Economics, National University of Ireland - Maynooth.
    7. Fan, John Hua & Fernandez-Perez, Adrian & Indriawan, Ivan & Todorova, Neda, 2020. "Internationalization of futures markets: Lessons from China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    8. Wu, Qinqin & Hao, Ying & Lu, Jing, 2017. "Investor sentiment, idiosyncratic risk, and mispricing of American Depository Receipt," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 1-14.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Timofei Bogomolov & Lixian Liu & Petko S Kalev, 2013. "Can time difference deter arbitrage opportunities?," Journal of Asset Management, Palgrave Macmillan, vol. 14(2), pages 79-94, April.
    2. 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).
    3. Pasquariello, Paolo, 2008. "The anatomy of financial crises: Evidence from the emerging ADR market," Journal of International Economics, Elsevier, vol. 76(2), pages 193-207, December.
    4. Gagnon, Louis & Andrew Karolyi, G., 2010. "Multi-market trading and arbitrage," Journal of Financial Economics, Elsevier, vol. 97(1), pages 53-80, July.
    5. Wu, Qinqin & Hao, Ying & Lu, Jing, 2017. "Investor sentiment, idiosyncratic risk, and mispricing of American Depository Receipt," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 1-14.
    6. Atanasova, Christina & Li, Mingxin, 2018. "Multi-market trading and liquidity: Evidence from cross-listed companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 117-138.
    7. Auguste, Sebastian & Dominguez, Kathryn M.E. & Kamil, Herman & Tesar, Linda L., 2006. "Cross-border trading as a mechanism for implicit capital flight: ADRs and the Argentine crisis," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1259-1295, October.
    8. Eduardo Levy-Yeyati & Sergio L. Schmukler & Neeltje van Horen, 2010. "Crises, Capital Controls and Financial Integration," Chapters, in: Masahiro Kawai & Mario B. Lamberte (ed.), Managing Capital Flows, chapter 6, Edward Elgar Publishing.
    9. Chen, Haiqiang & Choi, Paul Moon Sub & Hong, Yongmiao, 2013. "How smooth is price discovery? Evidence from cross-listed stock trading," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 668-699.
    10. Rövekamp, Ingmar, 2019. "US Monetary Policy and the Stability of Currency Pegs," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203525, Verein für Socialpolitik / German Economic Association.
    11. Yang, Ann Shawing & Carandang, Craig Alan Uyan, 2017. "Exploring the location and price differentials of cross-listed firms for arbitrage opportunities," Finance Research Letters, Elsevier, vol. 21(C), pages 85-91.
    12. 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.
    13. Chen, Haiqiang & Choi, Paul Moon Sub & Kim, Hyunseob, 2008. "American depositary receipts: Asia-Pacific evidence on convergence and dynamics," Journal of Multinational Financial Management, Elsevier, vol. 18(4), pages 346-368, October.
    14. Oksana Kim, 2016. "Market Efficiency and Arbitrage Opportunities for Russian Depositary Receipts Cross-Listed on the London Stock Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-36, June.
    15. Dey, Malay K. & Wang, Chaoyan, 2012. "Return spread and liquidity: Evidence from Hong Kong ADRs," Research in International Business and Finance, Elsevier, vol. 26(2), pages 164-180.
    16. Eichler, Stefan & Rövekamp, Ingmar, 2017. "Eurozone exit risk," CEPIE Working Papers 07/17, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    17. Alsayed, Hamad & McGroarty, Frank, 2012. "Arbitrage and the Law of One Price in the market for American depository receipts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1258-1276.
    18. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2009. "International financial integration through the law of one price: The role of liquidity and capital controls," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 432-463, July.
    19. Ghadhab, Imen & Hellara, Slaheddine, 2015. "The law of one price, arbitrage opportunities and price convergence: Evidence from cross-listed stocks," Journal of Multinational Financial Management, Elsevier, vol. 31(C), pages 126-145.
    20. Dodd, Olga & Frijns, Bart & Indriawan, Ivan & Pascual, Roberto, 2023. "US cross-listing and domestic high-frequency trading: Evidence from Canadian stocks," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 301-320.

    More about this item

    Keywords

    Arbitrage; Depository receipts; Multi-market trading; Emerging markets; Transaction costs;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:23:y:2013:i:c:p:342-357. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.