Home  Journals  Financial Analytics: Science and Experience  31(217) - 2014 August

Evaluating the effectiveness of arbitration pricing of Moscow Stock Exchange and London Stock Exchange

Available online: 16 August 2014

Subject Heading: Financial market

JEL Classification: 

Pages: 2-13

The paper considers the possibility of arbitration strategy regarding the depository receipts at the LSE IOB and the shares on the Moscow Stock Exchange. The main reason for choosing this particular area for this article is that the most of the trading on the LSE IOB is performed using transactions of the shares of the Russian companies. In December of 2013, the total volume of trading on the IOB amounted to 19.7 billion U.S. dollars, at that time, the trading volume of depository receipts of the Russian companies amounted to 17.2 billion U.S. dollars. Building of models of arbitration strategy requires defining of its parameters and inputting data on the ground of which you can later determine the break-even spread. Such data include as follows: the amount of the arbitration position, which reflects the cumulative amount of the open deals in both markets, which reaches 1 000 000 U.S. dollars; the price of the depositary receipts, which is determined individually for each receipt, in US dollars; the adjusted value of the local share of the LOC; brokerage commission when trading on the Moscow Stock Exchange and the London Stock Exchange is 0,02% of the transaction amount for both trading platforms. Having built an arbitration model for each security, the final list of the securities was defined, according to which in 2013, one can implement the strategy of spatial arbitration earning a profit. Based on the analysis of the break-even spreads, which have been identified for the period of 2013 the profitability of the initially invested funds amounted to 49%, which is a significant indicator for the relatively risk-free model. The program aimed at the accelerated converting of the local shares into depositary receipts, which was introduced in 2014. The program will allow cutting back on the length of the conversion operation from the several days to a couple of hours within one day. The article demonstrates the potential economic effect of the arbitrage transactions using the example of the most liquid financial instruments with dual listing. The paper points out that the aforementioned effect was equal to 55,4%. The authors state that the highest increase of the margin was demonstrated by the more expensive securities, such as shares and depository receipts of OAO Lukoil and OJSC Uralkali.

Keywords: arbitration pricing, strategy, Moscow Stock Exchange, London Stock Exchange, risk, transaction

References:

1. Novikov A.S. Analiz vozmozhnosti arbitrazhnykh sdelok s tsennymi bumagami i depozitarnymi raspiskami rossiiskikh emitentov [Analysis of the possibility of arbitrage transactions in securities and depository receipts of the Russian issuers]. Zhurnal nauchnykh publikatsii aspirantov i doktorantov – Journal of scientific publications of postgraduates and doctoral students, 2008. Available at: Link. (In Russ.)
2. Popov V.Yu., Shapoval A.B. Investitsii. Matematicheskie metody [Investment. Mathematical methods]. Moscow, Forum Publ., 2008, 143 p.
3. Fedorova E.A., Lukasevich I.Ya. Finansovaya integratsiya fondovykh rynkov: osobennosti razvivayushchikhsya stran [Financial integration of stock markets: the peculiarities of the developing countries]. Finansy i kredit – Finance and credit, 2012, no. 10, pp. 56–65.

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ISSN 2311-8768 (Online)
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