Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day

Kristian Rydqvist and Qinglei Dai

No 6074, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We estimate the costly-arbitrage model of Boyd and Jagannathan (1994) using Norwegian stock market data. Taxable distributions take place at two separate dates, one that entails the distribution of an imputation-tax credit and another the distribution of the cash dividend. We find that the costly-arbitrage model is consistent with observed stock returns around the ex-dividend day, but the model cannot explain the return patterns around the distribution of the tax credit. We relate the difference in price formation to uncertainty.

Keywords: Costly-arbitrage model; Estimation risk; Ex-dividend day; Imputation-tax credit; Legal risk; Withholding tax (search for similar items in EconPapers)
JEL-codes: C78 D40 G10 H26 (search for similar items in EconPapers)
Date: 2007-02
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