Discussion paper

DP6074 Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day

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.

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Citation

Rydqvist, K and Q Dai (2007), ‘DP6074 Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day‘, CEPR Discussion Paper No. 6074. CEPR Press, Paris & London. https://cepr.org/publications/dp6074