Arbitrage and the Law of One Price in the market for American depository receipts

► We examine the risks and returns to arbitraging UK stock-ADR pricing anomalies. ► We introduce pairs trading as the main mechanism by which stock-ADR parity is maintained, which contrasts with the direct arbitrage approach which is the main focus of the ADR literature. ► Pairs trading is cheap to implement, and carries minimal risk. ► The main disincentive to arbitrage stems from uncertainty toward trade duration. ► Stock-ADR prices are not auto-efficient, arbitrage via pairs trading succeeds in enforcing price parity.