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Primes and Scores: An Essay on Market Imperfections

Robert A. Jarrow and Maureen O'Hara
The Journal of Finance
Vol. 44, No. 5 (Dec., 1989), pp. 1263-1287
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328642
Stable URL: http://www.jstor.org/stable/2328642
Page Count: 25
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Primes and Scores: An Essay on Market Imperfections
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Abstract

This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, we establish arbitrage-based bounds on prime and score prices. We then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds. We find that prime and score prices do exceed stock prices, and often by a considerable amount. We demonstrate that this increased value is most likely due to the score's ability to save on the costs of dynamic hedging. We also show how short sale and trust size constraints impede the ability to arbitrage price disparities.

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