Conversion positions are formed throughout a trading day and the average position price is used to estimate the market's expectation of the next cash dividend. The results show that although theoretically sound and with a careful handling of transaction data, put-call parity cannot be used to predict the next cash dividend.
However, the failure of the model is not due to the uncertainty about the size or timing of the next dividend. In addition, failure to maintain the conversion position due to early exercise of the call option does not impact the results. The results also support findings by Zivney that the early exercise premium of puts is priced systematically differently than early exercise premiums of call options.
Citations Citations 5 References References However, in recent times, the riskless interest rate has been quite small, along with rising dividends, such that it is often profitable to early exercise the American call option see also Cox and Rubinstein for an explanation. We therefore present a new method for estimating future dividends which takes care of this fact. First note that for each pair of European call and put options with the same strike and maturity, implied dividends can be computed using a modified version of the well known parity relationship.
This technique is straightforward and does not depend on the assumptions about the underlying price process dynamics. Extracting Implied Dividends from Options Prices: The pricing of dividend futures in the European market: A first empirical analysis.
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