The valuation of American call options and the expected ex-dividend stock price decline |
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Institution: | 1. Cleveland Clinic, Cleveland, OH;2. Department of Urology, University of Kentucky, Lexington, KY;3. Cooper Drive Division, Veterans Affairs Medical Center, Lexington, KY;4. Department of Surgery, University of Kentucky, Lexington, KY |
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Abstract: | This study focuses on the ex-dividend stock price decline implicit within the valuation of American call options on dividend-paying stocks. The Roll (1977) American call option pricing formula and the observed structure of CBOE call option transaction prices are used to infer the expected ex-dividend stock price decline as a proportion of the amount of the dividend. The relative decline is shown to be not meaningfully different from one, confirming some recent evidence from studies which examined stock prices in the days surrounding ex-dividend. |
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