Essays on implied dividends

Abstract

This thesis uses option-implied dividends to investigate research questions in three different areas of finance: the ex-dividend day drop and related option pricing errors; insider trading on superior dividend knowledge; and analyst dividend forecast accuracy, incorporation of market information, and market response to analyst revisions.The first chapter investigates market expectations of the ex-dividend stock price decline implied by American options. Using a much larger set of option transactions than previous studies, I find the ex-dividend drop-o implied by option prices is significantly less than the cash dividend. The second focus of this study analyses factors that affect option pricing errors such as thin trading, nonsynchronous trading, and lower dividend yields. I also find an increase in option pricing errors for deep in-the-money, deep out-of-the-money, and put-call pairs that cross the bid-ask spread.The second chapter investigates, using a measure of dividends surprise calculated by put-call parity, whether analysts update their forecasts in response to new market information, and likewise, whether the market updates dividend expectations in response to analyst forecast revisions. I find that only superior analysts respond to changes in market information and that the market does not respond to changes in either non-superior or superior analyst forecast revisions. I also compare the accuracy of forecasts and determine the order of increasing forecast precision as non-superior individual analysts, superior individual analysts, option-implied, and consensus analyst forecasts.The final chapter investigates whether insiders trade on their superior knowledge of future changes in dividend policy. I use the difference between the dividend implied by option transaction prices before and after the announcement as a proxy for dividend surprise. I find that CEOs are more likely to accumulate stock preceding an announcement for an expected increase in the cash dividend. Whereas, Non-director executives and Other Officers and block-holders are more likely to accumulate stock for ii iii an unexpected increase. Directors were less likely to accumulate stock for an unexpected increase and I attribute this to their presence on the firm board. I also find that Directors are more likely to exercise their call options to acquire stock preceding an announcement for an expected increase in the cash dividend. However, Directors and Other Officers and block-holders are less likely to exercise their options for an unexpected increase in the cash dividend. The results are consistent with the information hierarchy hypothesis.

On Calibration Neural Networks for extracting implied information from American options

“…In order to eliminate this error, the authors [27] take the early-exercise premium into account for American-style options. For example, V C am = V C eu + ∆V C and V P am = V P eu + ∆V P .…”

“…Remark. Because of a generic calibration framework, the CaNN can easily deal with more complex situations, for example, the objective function (27) includes more than a pair of American price quotes which share the same implied dividend, for example, as in the work [22].…”

“…Supposing each option quote in the market includes American call and put prices, the idea behind the backward pass is to determine two parameters (σ * , q * ) within the American Black-Scholes model to best match the pair of market option prices, given the interest rate r, maturity time T , strike price K, and spot price S 0 . The objective function for the calibration procedure is found in Formula (27), which is equivalent to Criterion 28 in the case of n = 1. In practice, the market price is taken to be the mid-price of the bid and ask prices.…”