Arbitrage and Stock Mispricing: Empirical Evidence from GCC Markets

Abstract

Cross listing has become a worldwide phenomenon and is considered a great way for listed companies to raise extra capital and gain access to new markets and segments. However, the impact of cross listing is very vague and data and research regarding the subject in relation to the Arabian Gulf are very limited. It is very important to know the implications of cross listing; in addition, the relationship between cross listing and the price movement of the cross listed company in both the home and host markets (i.e., existence of arbitrage).The purpose of this research study is to not only gain a better insight on the performance and consequences of cross listing in the Gulf, but also whether arbitrage trading is possible or not, taking into consideration the difference in the listing currency between home and host markets, along with the level of volume traded on the stock. The sample data for this research study was manually collected from the official websites of the Bahrain Bourse, Bourse Kuwait and the Dubai Financial Markets, whilst exchange rates have been gathered from the Bloomberg Terminal system. There were 8 Bahraini cross listed companies as of 31st December 2019; however, 4 companies have been excluded due to extreme illiquidity of the stocks in both the home and host markets; therefore, a sample data of 4 firms were analysed using EViews 9 software and Statistical Product and Service Solutions (SPSS). The Wilcoxon Test was conducted to test for arbitrage between home and host markets; Multiple regression analysis was performed to test the relationship between arbitrage and liquidity, returns, and exchange rate; the Granger Causality test was used to test for causality between arbitrage and exchange rates. The Wilcoxon Test showed that there is a significant difference in share price of certain listed companies tested, on a yearly basis and for the period of 2016 to 2019 as a whole. The multiple regression showed different results for each analysed cross listed company, indicating that arbitrage is company based and not an index based, whilst the Granger Causality test showed that the exchange rate was not the cause of arbitrage, vice versa. This paper provides valuable input to all GCC listed companies, regulators, investors, and other Capital Market stakeholders by providing them with solid data on the effects and consequences of cross listing.