Stock Arbitrage on Cross-Sectional Cum-dividend & Ex-dividend Date

Abstract

This study aims to find the explanation of positive stock return on average in cross-sectional cum-dividend and ex-dividend date, which may give profit opportunity for arbitrageur. The empirical model based on Sharpe (1964) CAPM theory and Fama and French (1992) model is tested with additional variables of dividend yield, trading volume, and idiosyncratic risk. The strong positive alpha occurs on CAPM and Fama-French empirical model, meanwhile its explanatory power disappear on the final model which involves all variables. Except for the excess market return, other variables have no explanatory power to the excess stock return. It is also found that dividend yield negatively explains the excess capital gain during the ex-date.