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|Title||A violation of the law of one price: The Case of Heineken and Heineken Holding|
|Institution||University of Zurich|
|Faculty||Faculty of Economics, Business Administration and Information Technology|
|Abstract Text||Recently much attention has been given in the literature to the problem of asset mispricing. In a market where investors are rational and there are no barriers to arbitrage, a basic principle of financial theory should hold: identical assets should have identical prices. The pair of Heineken and Heineken Holding stocks is an appealing example of the systematic violation of this principle. The two stocks have identical underlying cash flows, but one is always traded at a discount with respect to the other. In this work I try to explain the observed phenomena from the perspective of style investing. In an economy where agents allocate their capital among broader categories, also called styles, assets which are part of the same style tend to comove more than can be explained by fundamental risk factors, and assets which are part of different styles tend to commove less. Based on the main differences between Heineken and Heineken Holding stocks, I consider three investment categories: stocks which are part of the AEX index, stocks with an ADR program and stocks which are traded on the US markets. The Heineken stock is a part of all three styles, while the .Heineken Holding stock is a part of none of them. Using the model presented in Barberis and Shleifer (2003) I study the price difference between the two stocks as a premium resulting from the market activity of style-investors. I analyze the comovement of this premium with three investment styles and uncover that the presence of an ADR program for the Heineken stock has the greatest impact on the price divergence of the two stocks. Furthermore I find that the model including all three investment styles explains up to 75% of the existing price difference between Heineken and Heineken Holding stock.|