Arbitrage Opportunities for Cross-Listed Stocks: Evidence from Russia

Abstract

We study alternative arbitrage strategies for stocks of Russian companies and the corresponding depository receipts issued in European exchanges. We describe schemes of arbitrage strategies with and without conversion, estimate all related transaction costs and compare the net returns. We find significantly profitable arbitrage opportunities. The long-short strategies without conversion, although being risky, generate returns which are about twice as high as the returns to the arbitrage strategies with conversion. Arbitrage opportunities are higher for less liquid pairs and in situations when the depository receipts are underpriced. Although the arbitrage returns have declined over time, they are still positive and higher than the market returns. Low liquidity of Russian depository receipts on European exchanges is a significant barrier to arbitrage.