Dividend spreads

Article Abstract:

The phenomenon known as the dividend spread is described for the first time. A dividend spread is an options trading strategy used when the underlying stock is about to go ex-dividend. The trader acquires a vertical spread by selling an in-the-money-call, and then buys another in-the-money call that has a lower exercise price. The trader then exercises the call. If the call sold is not exercised, the trader makes a profit because the stock price and the call price will fall on ex-dividend day. If the call sold is assigned to the trader, only transaction costs are lost. Open-interest and early exercise data is presented for in-the-money calls around ex-dividend dates. Previous results regarding the efficiency of the options market around the ex-dividend date are shown to be invalid. An estimate is provided of the effective bid-ask spread for trades made without information.

Finance, Corporations, Corporate finance

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Dividend behavior for the aggregate stock market

Article Abstract:

Aggregate corporate dividends are modeled as a function of corporate earnings. The model developed differs from earlier models originated by Lintner, Brittain, Fama, Babiak, and Shiller, in that it uses stock price changes to indicate permanent corporate earnings changes, rather than the earnings reported in companies' annual reports (their 'accounting' earnings). The model developed is compared to those that precede it and is shown to outperform earlier models of aggregate stock market behavior in the area of predicting future dividend changes.

Models, Stocks, Profits, Corporate profits

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Changes in the Standard and Poor's 500 list

Article Abstract:

The validity of the price-pressure hypothesis and the imperfect-substitutes hypothesis was investigated by studying changes in the Standard and Poor's (S&P) 500 Stock Index. Some 187 additions to the S&P Index between 1978 and 1988 were analyzed. The results could not demonstrate a strong case against the efficient markets hypothesis. Stock, bond, and call prices increased when listing in the S&P 500 was announced, while put prices decreased. These results were consistent with the information hypothesis.

Analysis, Economic research, Efficient market theory, Standard and Poor's 500-Stock Price Index

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