Arbitrage opportunities in the depositary receipts market: Myth or reality?

We analyze the price discrepancy between American depositary receipts (ADRs) and their corresponding underlying shares using a high frequency data set of French and American stocks. Albeit infrequent, it is shown that large deviations from the law of one price are present in the data and an arbitrage trading rule reveals that profits could have been made on these large disequilibria. We thus classify these markets as disintegrated and not fully efficient. An estimate of the minimum size necessary to make a price discrepancy profitable is provided and we propose this variable as a proxy for measuring the degree of efficiency displayed by the markets involved.