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?

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Revisiting an important episode

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The obvious arbitrage trade

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This is a risky trade…

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…and there are big shorting costs

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Valuing Palm in the presence of lending fees

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The actual ex post timeline

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The case of a known spinoff date

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Estimating FT,tusing put-call parity

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An example: Mar 16 data on Palm forwards

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Implied ex ante lending fees closely match ex post observed fees

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

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Implied lending fee for the Aug –Nov interval

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What if the spinoff date is uncertain?

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First-day comovement matches theory

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The co-integrating vector G at other times

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Summing up so far

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What’s left

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After May 8: no spinoff uncertainty

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Before May 9: a rational equilibrium if…

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Overall conclusions

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