Market Efficiency and Arbitrage Opportunities for Russian Depositary Receipts Cross-Listed on the London Stock Exchange

Oksana Kim ()
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Oksana Kim: Department of Accounting and Business Law, Minnesota State University Mankato, MH 150 Minnesota State University, Mankato, MN 56001, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2016, vol. 19, issue 02, 1-36

Abstract: This study examines the Russian stock market efficiency from two perspectives. First, we document that for the sample of Russian firms cross-listed on the Main Market of the London Stock Exchange (LSE) as Global Depositary Receipts (GDRs), the return series obtained from both the local market and the LSE are time-invariant and hence, predictable. This suggests that the market is inefficient with respect to pricing Russian GDRs and that investors are likely to make systematic nonzero profits. Second, we document profitable arbitrage opportunity surrounding the announcement to adopt IFRS, which is an additional evidence of market inefficiency. The significant pricing spread observed on this key date was due to the differential market reaction to IFRS adoption — neutral on the local MICEX exchange dominated by individual traders and significantly negative on the LSE dominated by institutional investors. This finding can be explained by (i) informational advantages of the local investors due to geographic proximity, (ii) differential expectations with respect to governance norms and listing requirements, and (iii) difference in portfolio composition of the two investor groups.

Keywords: Arbitrage; cross-listing; global depositary receipts; market efficiency; Russian stock market (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S0219091516500077

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