ANOMALIES: THE LAW OF ONE PRICE IN FINANCIAL MARKETS Flashcards
Provide examples of financial market anomalies where the Law of One Price (LOP) appears to be violated.
Examples include closed-end country funds, American depositary receipts (ADRs), twin shares, dual-class shares, and corporate spinoffs.
Explain the concept of twin shares in financial markets, using the example of Royal Dutch/Shell, and how it deviates from the Law of One Price (LOP).
Royal Dutch/Shell had two types of shares with fixed claims on the company’s profits. Despite being highly liquid, the ratio of share prices deviated significantly from the expected value, indicating a violation of the LOP.
How did dual-class shares, as exemplified by Molex, demonstrate a violation of the Law of One Price (LOP)?
Molex had two classes of shares with different voting rights, yet the premium on voting shares fluctuated significantly, which cannot be justified by rational factors.
What is the significance of arbitrage opportunities in the context of anomalies in financial markets, as discussed in the paper? What are the barriers?
Arbitrage opportunities allow investors to exploit mispricings and restore price equality, but barriers such as short-selling constraints or liquidity issues can prevent arbitrageurs from fully correcting deviations from the LOP.
