Mispricing and Lasting Arbitrage between Parallel Markets in the Czech Republic

Jan Hanousek () and Libor Nemecek
Additional contact information
Libor Nemecek: CERGE-EI

Finance from EconWPA

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.

Keywords: Arbitrage; Co-movements of financial markets; Emerging markets; Integration of emerging markets; Mispricing (search for similar items in EconPapers)
JEL-codes: D40 E44 G12 G14 (search for similar items in EconPapers)
Date: 2001-02-19
Note: Type of Document - Acrobat PDF; pages: 33 ; figures: Included
View list of references View citations in EconPapers

Downloads: (external link)
http://129.3.20.41/eps/fin/papers/0012/0012007.pdf (application/pdf)

Related works:
Journal Article: Mispricing and lasting arbitrage between parallel markets in the Czech Republic (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0012007

Access Statistics for this paper

More papers in Finance from EconWPA
Series data maintained by EconWPA ().