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To assess stock market informational efficiency with minimal data snooping, we take the view of a statistician with little knowledge of finance. The statistician uses techniques such as least squares to estimate peer-implied fair values from the market values of replicating portfolios with the same accounting statements as the company being valued. Divergence of a company's peer-implied value estimate from its market value represents mispricing, motivating a convergence trade that earns risk-adjusted returns of up to 10% per year and is economically significant for both large and small cap firms. The rate of convergence decays to zero over the subsequent 34 months.

We study the optimal trading policy of an arbitrageur who can exploit temporary mispricing in a market with two convergent assets. We build on the model of Liu and Timmermann (2013) and include transaction costs, which impose additional limits to the implementation of such convergence trade strategy. We show that the presence of transaction costs could reveal an endogenous stop-loss concern in a certain economy, which affects the optimal policy of the arbitrageur in significant ways. Using pairs of dual-listed Chinese stock shares as samples and a pairs trading strategy based on standard deviation of the spread as benchmark, we demonstrate the efficiency of the strategy implied by our model. Several extensions of our model are also discussed.

Convergence trades exploit temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively overpriced assets. This paper studies optimal convergence trades under both recurring and nonrecurring arbitrage opportunities represented by continuing and "stopped" cointegrated price processes and considers both fixed and stochastic (Poisson) horizons. Conventional long-short delta neutral strategies are generally suboptimal and it can be optimal to simultaneously go long (or short) in two mispriced assets. Optimal portfolio holdings critically depend on whether the risky asset position is liquidated when prices converge. Our theoretical results are illustrated on pairs of Chinese bank shares traded on both the Hong Kong and China stock exchanges. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

This paper studies the spread between the newly issued 30 year Treasury bond and the old 30 year bond. The spread follows a systematic pattern over the auction cycle: it begins high at an auction date, and converges toward zero by the next auction date. I document the profits on establishing a long old bond/ short new bond convergence trade and rolling this over every auction cycle, over a period from 6/95 to 11/99. Despite the systematic convergence, the average profits are close to zero, and profits covary with the stock market in a manner resembling a short put option position. The difference in repo market financing rates between the two bonds is an important component of the costs in carrying the position. I then ask what economic factors account for the level and time variation in the spread. Using the spread between commercial paper and T-Bills to identify changes in investor preference for liquid assets, I establish that aggregate factors affecting liquidity preference plays an important role in the variation of the bond/old-bond spread. The evidence also establishes that new bonds are imperfect substitutes for other bonds, and therefore changes in the supply of new bonds, such as in recent Treasury buybacks, will have important effects on bond market spreads.