DP6074 Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day
|Author(s):||Qinglei Dai, Kristian Rydqvist|
|Publication Date:||February 2007|
|Keyword(s):||costly-arbitrage model, estimation risk, Ex-dividend day, imputation-tax credit, legal risk, withholding tax|
|JEL(s):||C78, D40, G10, H26|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6074|
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.