Asymmetric Arbitrage Opportunities for Cross-Listed Stocks: Evidence from Russia

Emerging Markets Finance and Trade. 2020. Vol. 56. No. 6. P. 1402–1422.

Gorbatikov Е., Dobrynskaya V. V.

We study alternative arbitrage strategies for stocks of Russian companies and the corresponding depositary receipts issued in European exchanges (‘mirror trades’). We provide evidence for significant arbitrage opportunities in Russia, and the potential returns are higher when the depository receipts are underpriced relative to stocks on the domestic market. Such asymmetry in arbitrage returns may be a consequence of money expatriation from Russia using these ‘mirror trades’ even when they are unprofitable, creating further mispricing. We also show that the long-short ‘buy-and-hold’ strategies, although being risky, generate returns which are about twice as high as the returns to the conversion strategies. Although the arbitrage returns have declined over time, they are still positive and generally higher than the market returns. Low liquidity of Russian depositary receipts on European exchanges is a significant barrier to arbitrage.

Keywords: market efficiency, arbitrage, depository receipts