Chester Spatt Presentation

A solution to the Palm–3Com spinoff puzzles

Presentation at the Q-Group meeting, Amelia Island, FL
March 31, 2015

Martin Cherkes
Charles M. Jones
Chester S. Spatt

Bubbly pricing?

Revisiting an important episode

The obvious arbitrage trade

This is a risky trade…

…and there are big shorting costs

Valuing Palm in the presence of lending fees

The actual ex post timeline

The case of a known spinoff date

Estimating _FT,tusing put-call parity

An example: Mar 16 data on Palm forwards

Implied ex ante lending fees closely match ex post observed fees

Aug vs. Nov forward prices reveal expectations about Aug-Nov lending fees

Implied lending fee for the Aug –Nov interval

What if the spinoff date is uncertain?

First-day comovement matches theory

The co-integrating vector G at other times

Summing up so far

What’s left

After May 8: no spinoff uncertainty

Before May 9: a rational equilibrium if…

Overall conclusions

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