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I'm looking into modelling monthly stock prices and want to start off by using data from Yahoo Finance.

I know that the closing prices given there are adjusted for stock splits and dividends, but I'd like to use the given raw data and adjust it myself.

For modelling purposes, should I adjust the past prices for dividends? I've researched this and read mixed opinions expressed.

My thought process was that suppose XYZ closes at 100 before a dividend of 0.05 is implemented. On the next day, the stock should ideally open at 99.95 and automatically account for the dividend given out.

Is this right or am I really wrong? Sorry if this is a noob question.

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1 Answer 1

The line of thinking is theoretically correct and it is right if you assume that:

  1. no other event happened during the trading day or in recent periods (if, for instance, one has a stock split recently, you will take into account also that and so on for all corporate events);
  2. The dividend is a cash-dividend (in the case you will have a stock-dividend things are slightly different);

As regards the first question, since you cannot assume those hypothesis in the real world, you have to consider adjusted prices, that, however, are provided by yahoo_finance (the last column in the historical data table). It depends on the kind of survey you have to do, but, generally, it is better to conduct an empirical analysis by using adjusted-prices because of the reasons above.

For the second one, you are in wrong because in that way you're adjusting prices only for cash-dividends, overlooking the other corporate finance events.

Also Here you can find an answer given on this site that you could find pretty useful.

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