Ex-Dividend Stock Price Behavior and Arbitrage Opportunities

David C. Heath and Robert Jarrow ()
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David C. Heath: Cornell University, USA

Chapter 3 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 47-60 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper investigates the relation between ex-dividend stock price behavior and arbitrage opportunities. In a continuous trading, frictionless economy, we demonstrate that it is possible for the ex-dividend stock price drop to differ from the dividend, and still short-term traders cannot generate arbitrage profits. Our argument is independent of transaction costs. The relevance of this insight to estimating the marginal tax bracket based on ex-dividend stock price drops is explored. Furthermore, this insight is also applied to the area of option pricing in which the special class of escrowed dividend stock price processes is studied. We show that most elements from this class of stock price processes generate invalid option pricing formulas.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Related works:
Journal Article: Ex-dividend Stock Price Behavior and Arbitrage Opportunities (1988)
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