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Primes and Scores: An Essay on Market Imperfections

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  • 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, the authors establish arbitrage-based bounds on prime and score prices. They then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds. They find that prime and score prices do exceed stock prices, and often by a considerable amount. They demonstrate that this increased value is most likely due to the score's ability to save on the costs of dynamic hedging. They also show how short sale and trust size constraints impede the ability to arbitrage price disparities. Copyright 1989 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 44 (1989)
Issue (Month): 5 (December)
Pages: 1263-87

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Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1263-87

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Cited by:
  1. Henderson, Brian J. & Pearson, Neil D., 2011. "The dark side of financial innovation: A case study of the pricing of a retail financial product," Journal of Financial Economics, Elsevier, vol. 100(2), pages 227-247, May.
  2. John R. Ezzell & James A. Miles & J. Harold Mulherin, 2001. "Is there Really a When-Issued Premium?," Claremont Colleges Working Papers 2001-34, Claremont Colleges.
  3. Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci, 2012. "Put-Call Parity and Market Frictions," Working Papers 447, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. David M. Schizer & Michael R. Powers & Martin Shubik, 2003. "Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales," Yale School of Management Working Papers ysm356, Yale School of Management.
  5. Charupat, Narat & Prisman, Eliezer Z., 1997. "Financial Innovations and Arbitrage Pricing in Economies with Frictions: Revisited," Journal of Economic Theory, Elsevier, vol. 74(2), pages 435-447, June.
  6. Gagnon, Louis & Andrew Karolyi, G., 2010. "Multi-market trading and arbitrage," Journal of Financial Economics, Elsevier, vol. 97(1), pages 53-80, July.
  7. Huckins, Nancy White, 1995. "Repackaging cashflows and the creation of value: The case of primes and scores," International Review of Financial Analysis, Elsevier, vol. 4(2-3), pages 123-142.
  8. Schultz, Paul & Shive, Sophie, 2010. "Mispricing of dual-class shares: Profit opportunities, arbitrage, and trading," Journal of Financial Economics, Elsevier, vol. 98(3), pages 524-549, December.

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