An Arbitrage Model for the Stock Price Adjustment in the Dividend Period

Maria Borges ()

No 2007/09, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: Following a dividend distribution, investors expect the stock price to decrease on the ex-dividend day. With no market imperfections, the price decrease should exactly match the amount of the dividend, thus eliminating all opportunities for profitable arbitrage. Allowing for different taxes on dividends and on capital gains results in a stock price adjustment ratio different from one, but there is still a unique equilibrium. With a simple model, considering four types of investors, we show that the consideration of transaction costs results in multiple possible equilibria (equilibrium zone), defined by the arbitrage boundaries of each type of investors. We also show that trading activity by the different types of investors is reflected in abnormal trading volume.

Keywords: Dividend; Arbitrage; Market equilibrium; Transactions costs; Taxes (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cfn
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More papers in Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL.
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