Stock-ADR Arbitrage: Microstructure Risk

Sovan Mitra, V.L. Raju Chinthalapati, Ephraim Clark and Frank McGroarty

Journal of International Financial Markets, Institutions and Money, 2019, vol. 63, issue C

Abstract: This paper is the first to highlight that the stock-ADR arbitrage pair trading found by Alsayed and McGroarty (2012) is directly influenced by the market microstructure of ADRs. In Alsayed and McGroarty (2012) they are the first to demonstrate that arbitrage opportunities exist between stocks and their ADRs, through convergence pairs trading. Given that such arbitrage opportunities exist, we pose the question as to why such pair trades occur, rather than be eliminated by the law of one price? Using high frequency data over a 3 year sample period, with over 3.7 million 1-min observations, we investigate stock-ADR arbitrage pair trading.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:63:y:2019:i:c:s1042443118304694

DOI: 10.1016/j.intfin.2019.08.004

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