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- Title
Primes and Scores: An Essay on Market Imperfections.
- Authors
Jarrow, Robert A.; O'Hara, Maureen
- Abstract
This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, we establish arbitrage-based bounds on prime and score prices. We then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds. We find that prime and score prices do exceed stock prices, and often by a considerable amount. We demonstrate that this increased value is most likely due to the score's ability to save on the costs of dynamic hedging. We also show how short sale and trust size constraints impede the ability to arbitrage price disparities.
- Subjects
STOCK prices; PRICES; STOCK exchanges; FACTOR tables; ARBITRAGE; TRANSACTION costs; HEDGING (Finance); TALLIES; PRICE discrimination; PRICES of securities
- Publication
Journal of Finance (Wiley-Blackwell), 1989, Vol 44, Issue 5, p1263
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1989.tb02653.x