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The ex-interest behaviour of UK gilt prices

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  • Lynn Hodgkinson
  • Jo Wells

Abstract

Frank and Jagannathan (1998) compare ex-dividend drop in share price to the dividend paid in a tax-free environment and argue that market microstructure effects may explain a ratio of less than one. This study examines whether the results are supported in the UK gilt market where tax effects are also likely to be negligible. As there is a time delay from a stock's closing price on the cum-dividend day to the ex-dividend day of, usually, up to 3 days, a proxy is used to account for changes in the stock price unrelated to the dividend payment. An equilibrium model such as the capital asset pricing model is usually used for this purpose. The availability of gilt yield curve data from the Bank of England provides a potentially better proxy for the effects of changes on the gilt prices which are unrelated to the coupon paid. The results provide evidence that the gilt drop-off ratio is, in the main, not significantly different from one.

Suggested Citation

  • Lynn Hodgkinson & Jo Wells, 2009. "The ex-interest behaviour of UK gilt prices," Applied Financial Economics, Taylor & Francis Journals, vol. 19(21), pages 1753-1760.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:21:p:1753-1760
    DOI: 10.1080/09603100902984335
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    References listed on IDEAS

    as
    1. Frank, Murray & Jagannathan, Ravi, 1998. "Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes," Journal of Financial Economics, Elsevier, vol. 47(2), pages 161-188, February.
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