Ask Colin

Why don't data vendors adjust prices for dividends?

The detailed question was:

My current data supplier adjusts ASX data for stock splits, but not for ordinary dividends. However, it is my view that a dividend payment creates a non-technical price gap in the price history of a security and that this dividend gap, for the purpose of accurate system back-testing, should be removed by back-adjustment of the historical price data for that security.  This would be akin to a continuous back-adjusted futures contract where the roll-over gaps are removed by back-adjustment of individual futures contract months.

I am not aware of a vendor who is providing such a service.

You could do it manually using Insight Trader or MetaStock for those stocks you are interested in, but I guess you want to do it for them all, which would be a big job manually.

The reason nobody is offering such a service is that the mainstream thought is that charts are not adjusted for dividends. The usual reasoning is that once a dividend is paid, it passes out of the price, but the next dividend is then progressively incorporated into the price. The way you adjusted all the data between dividends to reflect the portion of the dividend that is already reflected in the price would be highly theoretical. There would also be practical difficulties of maintaining the data in fractions of a cent to many decimal places to accurately reflect all the changes. However, none of this would be impossible, now we have computers with big fast hard drives, unlike the old days of hand-drawn charts. The question is whether it is worth doing and it seems the general consensus is no.

The quick-and-dirty method you propose is used for special dividends, which are in effect capital returns. It is sound theoretically for capital returns because they can generally not be anticipated and are therefore not already reflected in the price, except for the short period between announcement and the ex-dividend date.

My feeling is that you pose an interesting argument to correct a discontinuity in the chart. The quick-and-dirty method you propose is practical, but questionable theoretically.

Are you be aware of an Australian data provider of ASX data who provides such a service?