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

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  • Rydqvist, Kristian
  • Dai, Qinglei

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.

Suggested Citation

  • Rydqvist, Kristian & Dai, Qinglei, 2007. "Investigation of the Costly-Arbitrage Model of Price Formation Around the Ex-Dividend Day," CEPR Discussion Papers 6074, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6074
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    References listed on IDEAS

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    More about this item

    Keywords

    Costly-arbitrage model; Estimation risk; Ex-dividend day; Imputation-tax credit; Legal risk; Withholding tax;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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