Market anomaly and arbitrage opportunity around ex-divident day

Abstract: Purpose of this study is to investigate market anomaly and possible arbitrage opportunity around ex-dividend day. We investigate most liquid common stock prices behavior around the world. Our sample data covers NYSE (Companies from S&P 100 index), London Stock Exchange (Companies from FTSE 100 index), Shanghai Stock Exchange (Companies from SSE180 index) and Tokyo Stock Exchange (Companies from TOPIX 100 index). We also investigate possible arbitrage opportunity based on abnormal return and short-term trading activities around ex-day. Based on raw price drop ratio, market adjusted price ratio, raw price drop ratio, market adjusted price drop ratio, market adjusted abnormal return and relative trading volume we developed six null-hypotheses and conclude this study. We used t-test to determine the mean differences between theoretical values and observed values and for median differences we used Wilcoxon Sign Rank Test. This study observed an equal drop of stock prices compared to dividend amount from New York and Shanghai Stock Exchange. We found no evidence of short-term trading activities around ex-date from both markets. In Tokyo Stock Exchange stock prices fall less than the dividend amount and individual dividend amount has higher taxation compare to capital gain. It provides strong evidence in favor of tax effect and we also recorded significant evidence of short-term trading activities before ex-dividend day. However, we documented mixed evidence from London Stock exchange. In London Stock Exchange Stock Prices drop more than dividend amount and dividend has higher taxation than capital gain. This evidence is not consistent with tax hypothesis but we found strong evidence of short-term trading before ex-dividend day. Key words: Market anomaly, arbitrage opportunity and short-term trading, ex-dividend day.