Primes and Scores: An Essay on Market Imperfections
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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Volume (Year): 44 (1989)
Issue (Month): 5 (December)
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