Abstract

http://ssrn.com/abstract=1271607
 
 

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Expected Returns and Dividend Growth Rates Implied by Derivative Markets


Benjamin Golez


University of Notre Dame

November 19, 2013

Accepted at the Review of Financial Studies, 2013

Abstract:     
The dividend-price ratio is a noisy proxy for expected returns when expected dividend growth is time-varying. This paper uses a new and forward-looking measure of dividend growth extracted from S&P 500 futures and options to correct the dividend-price ratio for changes in expected dividend growth. Over January 1994 through June 2011, dividend growth implied by derivative markets reliably forecast future dividend growth, and the corrected dividend-price ratio predicts S&P 500 returns substantially better than the standard dividend-price ratio, in-sample and out-of-sample. Time-varying expected dividend growth is important to explain price movements, especially because it is highly correlated with expected returns.

Number of Pages in PDF File: 68

Keywords: present value models, dividend-price ratio, return predictability, derivatives

JEL Classification: G12, G13

Accepted Paper Series


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Date posted: September 23, 2008 ; Last revised: November 21, 2013

Suggested Citation

Golez, Benjamin, Expected Returns and Dividend Growth Rates Implied by Derivative Markets (November 19, 2013). Accepted at the Review of Financial Studies, 2013. Available at SSRN: http://ssrn.com/abstract=1271607 or http://dx.doi.org/10.2139/ssrn.1271607

Contact Information

Benjamin Golez (Contact Author)
University of Notre Dame ( email )
256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)
HOME PAGE: http://business.nd.edu/BenGolez/
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