Price Discrepancy of Dual-Listed Companies in an Arbitrage-Free Market Pair

Abstract

The topics of dual-listed companies (DLC, or Siamese twins) have been greatly intensified on arbitrage. Essentially, the implication from the effectiveness of arbitrage, which is theoretically assumed to function as the mechanism to realize the fundamental value of the underlying asset, is that the mispricing is not simply irrational in the real world, and the market is not as efficient as we expect it to be. Now the question is this- what can we expect from the prices of DLCs with the absence of arbitrage opportunities? Will the pair price merely show more randomness in the absence of arbitrage instead? One possible answer may hide in the performance of the DLCs listed on Chinas Shanghai/Shenzhen stock market (SSE/SZE) and Hong Kong (HSI) market. In this paper, we attempt to evaluate the mispricing phenomena from the arbitrage-free market pair by adapting VAR and error correction model. Our results show that even without arbitrage spaces, many of the pairs still present a long-term convergence. Also we find that the the price of the host market does not dominate its counterpart in the foreign market as expected, and after controlling the potential market noise, a more favorable result of most of the DLCs show cointegration turns out. This implies that there should be some significant but undefined factors hidden in the whole market driving the dynamics of the mispricing.