Researchers from HSE University and London Business School have carried out research into the dynamics of the prices for Russian companies’ stocks and depositary receipts. The research indicates that, thanks to their price differences, there are opportunities for profitable trading with zero or, at least, minimum risk.
This was the first time such research was carried out with respect to Russian companies. The key information was drawn from Datastream database, where researchers tracked the prices for the depositary receipts of Russian companies. They analyzed only those companies with stocks that had high liquidity from 2006 and 2013 and were sold on other exchanges outside of Russia. These were mainly stock markets in London and Frankfurt. A total of nine top Russian companies were included in the sample: Lukoil, Rosneft, Sberbank, Surgutneftegas, Gazpromneft, NLMK, MMK, Uralkali, and PIK Group.
Firstly, the researchers looked at the opportunities for doing arbitrage conversion deals. This is a type of investment strategy, which means getting profit with zero risk. This can be done by almost simultaneously buying and selling related assets (stocks and depositary receipts of the same company) on different stock exchanges. For example, an investor buys a company’s shares at one price on the Frankfurt Stock Exchange and immediately sells the same shares at a higher price at the Moscow exchange. There are usually transaction costs for the conversion, but amount is insignificant.
Another investment strategy discussed in paper is arbitrage without conversion, or a ‘buy-and-hold’ approach. This, too, foresees speculating on the difference in prices for the same company’s shares and depositary receipts. However, unlike conversion arbitrage, in this case, deals are not concluded immediately, but within a period of time. As such, the investor buys stocks when their prices on the two exchanges differ, and sells when they are the same.
The ‘buy-and-hold’ strategy is considered to be the riskier approach. Theoretically, the prices for the same asset on two different exchanges should equalize, but in reality, this can be a long and not always predictable process. Therefore, the investor may have to bear losses.
The results of the analysis indicate that this is more common when prices for depository receipts on international exchanges are lower than for shares. Furthermore, the research notes the difference in prices that may persist for long periods of time. Thus, there are opportunities for profitable arbitrage deals. ‘Buy-and-hold’ strategies, despite being risky, tend to generate returns, which are about twice as high as the returns from conversion strategies.