Improved Dividend Estimation from Intraday Quotes

Abstract

Liquid financial markets, such as the options market of the S&P 500 index, create vast amounts of data every day, i.e., so-called intraday data. However, this highly granular data is often reduced to single-time when used to estimate financial quantities. This under-utilization of the data may reduce the quality of the estimates. In this paper, we study the impacts on estimation quality when using intraday data to estimate dividends. The methodology is based on earlier linear regression (ordinary least squares) estimates, which have been adapted to intraday data. Further, the method is also generalized in two aspects. First, the dividends are expressed as present values of future dividends rather than dividend yields. Second, to account for heteroscedasticity, the estimation methodology was formulated as a weighted least squares, where the weights are determined from the market data. This method is compared with a traditional method on out-of-sample S&P 500 European options market data. The results show that estimations based on intraday data have, with statistical significance, a higher quality than the corresponding single-times estimates. Additionally, the two generalizations of the methodology are shown to improve the estimation quality further.

Decomposing the Option Pricing Problem : Estimating the Causal Factors: Interest Rates, Dividends, and Risk-Neutral Probabilities

“…The box position was used by, e.g., Ronn and Ronn (1989). Furthermore, Söderbäck et al (2022) presented the sloped asset position, which can be achieved by a linear combination of two synthetic forward position,…”

“…One approach is to use one of the four option positions to estimate the interest rate or the dividend quantities. For example, Brenner and Galai (1986) use the put-call parity directly to estimate the interest rate, Ronn and Ronn (1989) use the box-position for interest rate, van Binsbergen et al ( 2012) utilize a dividend-steepener to estimate dividend strips, and Söderbäck et al (2022) presented the asset slope position as an alternative to estimate the dividend. Further, the idea is not limited to options contracts.…”