Dividend Dynamics and the Term Structure of Dividend Strips
62 Pages Posted: 19 Mar 2012 Last revised: 8 Mar 2014
There are 3 versions of this paper
Dividend Dynamics and the Term Structure of Dividend Strips
Endogenous Dividend Dynamics and the Term Structure of Dividend Strips
Endogenous Dividend Dynamics and the Term Structure of Dividend Strips
Date Written: November 5, 2013
Abstract
Many leading asset pricing models are specified so that the term structure of dividend volatility is either flat or upward sloping. Related, these models predict that the term structures of expected returns and volatilities on dividend strips (i.e., claims to dividends paid over a prespecified interval) are also upward sloping. However, the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their proposed dividend dynamics with processes that generate stationary leverage ratios. Under such policies, shareholders are being forced to divest (invest) when leverage is low (high), which shifts risk from long-horizon to short-horizon dividend strips. Even if discount rates are specified as constants, this mechanism also captures the "volatility puzzle'' (Shiller (1981)) in that stock return volatility is greater than long-horizon dividend volatility.
Keywords: Dividend Strips, Term Structure or Risk Premia
JEL Classification: G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson