The Option-Implied Ex-Dividend Drop
44 Pages Posted: 10 Mar 2020
Date Written: February 18, 2020
Several recent studies have used option-implied dividends to investigate the term structure of equity. A crucial question is whether these dividend strips need to be adjusted to take into account the difference in taxation between dividends and capital gains. Unlike prior research, we find an option-implied ex-day decline that is less than the cash dividend and of a similar magnitude to the overnight ex-day stock price decline. In addition, we use put-call arbitrage to identify several option mispricing factors. Our method for calculating market expectations of dividends is useful for research topics including dividend policy, analyst forecasts, and asset pricing.
Keywords: ex-dividend, option mispricing, price efficiency, dividend forecasts
JEL Classification: G12, G13, G14, G17
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