Post by Sapphire Capital on Aug 21, 2008 23:04:44 GMT 4
Dividend Risk
Stefan Kruchen
Zurich Cantonal Bank
Paolo Vanini
University of Zurich - Swiss Banking Institute (ISB); Zurich Cantonal Bank
July 29, 2008
Abstract:
Comparing realized dividends with dividend forecasts, we propose to describe dividend risk by a truncated t-distribution. We then investigate the impact of dividend uncertainty on European and American option prices. We find that the impact of dividend uncertainty on option prices is negligible for short term options. Dividend timing risk is only relevant in case of European options, if the ex-dividend date might be postponed to occur after the option's maturity. But the impact of dividend risk on long dated option prices is not negligible since analysts' forecasts scatter much more for several years of dividend forecast. We finally propose a modification of Lintner's (1956) partial adjustment model for dividends which improves prediction of dividend cuts.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1184858_code265735.pdf?abstractid=1184858&mirid=3
Stefan Kruchen
Zurich Cantonal Bank
Paolo Vanini
University of Zurich - Swiss Banking Institute (ISB); Zurich Cantonal Bank
July 29, 2008
Abstract:
Comparing realized dividends with dividend forecasts, we propose to describe dividend risk by a truncated t-distribution. We then investigate the impact of dividend uncertainty on European and American option prices. We find that the impact of dividend uncertainty on option prices is negligible for short term options. Dividend timing risk is only relevant in case of European options, if the ex-dividend date might be postponed to occur after the option's maturity. But the impact of dividend risk on long dated option prices is not negligible since analysts' forecasts scatter much more for several years of dividend forecast. We finally propose a modification of Lintner's (1956) partial adjustment model for dividends which improves prediction of dividend cuts.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1184858_code265735.pdf?abstractid=1184858&mirid=3