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Over‐the‐Counter Option Market Dividend Protection and “Biases” in the Black‐Scholes Model: A Note

Geske, Robert and Roll, Richard and Shastri, Kuldeep (1983) Over‐the‐Counter Option Market Dividend Protection and “Biases” in the Black‐Scholes Model: A Note. Journal of Finance, 38 (4). pp. 1271-1277. ISSN 0022-1082. https://resolver.caltech.edu/CaltechAUTHORS:20190507-081911028

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Abstract

Most options are traded over‐the‐counter (OTC) and are dividend “protected;” the exercise price decreases on the ex date by an amount equal to the dividend. This protection completely inhibits the early exercise of American call options. Nevertheless, OTC‐protected options have market values which differ systematically from Black‐Scholes values for European options on non‐dividend paying stocks. The pricing difference is related to both the variance of the underlying stock return and to time until expiration of the option, but it is quite small in dollar amount.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1111/j.1540-6261.1983.tb02295.xDOIArticle
https://www.jstor.org/stable/2328024JSTORArticle
Additional Information:© 1983 the American Finance Association. We thank the CIVITAS Foundation at the University of California, Los Angeles, and the Graduate School of Business at the University of Pittsburgh for financial support. We also thank Michael Brennan and Jon Ingersoll for their comments.
Funders:
Funding AgencyGrant Number
University of California Los Angeles (UCLA)UNSPECIFIED
University of PittsburghUNSPECIFIED
Issue or Number:4
Record Number:CaltechAUTHORS:20190507-081911028
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20190507-081911028
Official Citation:GESKE, R. , ROLL, R. and SHASTRI, K. (1983), Over‐the‐Counter Option Market Dividend Protection and “Biases” in the Black‐Scholes Model: A Note. The Journal of Finance, 38: 1271-1277. doi:10.1111/j.1540-6261.1983.tb02295.x
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95279
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:07 May 2019 20:48
Last Modified:03 Oct 2019 21:11

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