The law of one price in global depository receipts: Empirical evidence from cross-listed Egyptian equities

This paper tests whether the law of one price holds for Egyptian stocks listed on the Egyptian Stock Exchange and foreign cross-listed as Global Depository Receipts (GDRs) on the London Stock Exchange. We also examine the effect of two variables on price parity: the different trading week between Egypt and London; as well as the change in foreign exchange rate regime. The study finds significant price deviations from parity between Egyptian GDRs and their underlying stock, which is unexplained by the different trading weekdays or the exchange rate regimes. Despite the violation of price parity, we find that the return distribution of the Egyptian GDRs and their underlying stocks are identical. We discuss the reasons for the violation of the law of one price in our sample and why the violation cannot be considered as forgone arbitrage opportunities.