Interesting but even if the stock did trade the next day down by the full amount of the dividend and not some percentage of it, I doubt long-term investors would go through the trouble of selling and re-purchasing their stocks to avoid the dividend. The commission cost and the extra trouble it would cause at tax time would not be worth it.
I'm hung up on semantics when you're suggesting pseudo-arb be substituted for arbitrage? LOL.
Quote from black diamond:
You are getting hung up on semantics here. Replace the word arb with pseudo-arb if you want and see if you still object. I think you know that a "true" textbook arb is rare or non-existent, there almost always at least some execution risk. The word arb is commonly used loosely to mean a trade with an disproportionate expected return for the risk, and I am not going to write a disclaimer every time I use it! But maybe free money was a strong phrase, I'll give you that one.
That aside, the fact is if they
The drop should be less than the value of the dividend in normal cases, or else there would be a tax advantage for long term investors to sell just before the dividend and buy back after. So for example, say the market prices an ex-dividend drop of 80% of the value of the dividend. If I pay no taxes on dividends, I can buy the stock just before it goes ex-div and sell right after, and keep 20% of the value of the dividend in expectation while being exposed to price risk for a very short time. I can short an index future to hedge some of the price risk. You are right that it is not no-risk but you would "normally" have to hold price risk much longer for that level of expected return.
Corporate investors used to have very low taxes on dividends, no taxes in some cases, and they put a lot of money into dividend capture strats until the tax laws changed in the 1980s. I'd be surprised if there not similar opportunities in at least some small niches out there now.
Quote from spindr0:
I'm hung up on semantics when you're suggesting pseudo-arb be substituted for arbitrage? LOL.
How do you know that a "true" textbook arb is rare or non-existent? Have a source? I don't know that at all. I do know that there are different kinds of arbitrage and in the option arena where I have some familiarity, they occur every day (conversions and reversals). I've even found some myself and I'm just a lowly retail trader
As for execution risk, that has as much to do with your proposed dividend/tax arbitrage is as commissions do.
And as for shorting an index future to hedge some of the price risk, you're confusing hedging with arbitrage (minimizing the risk versus risk free). Or have we just mutated to another topic?
