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http://ssrn.com/abstract=2024235
 
 

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Dividend Dynamics and the Term Structure of Dividend Strips


Frederico Belo


University of Minnesota; National Bureau of Economic Research (NBER)

Pierre Collin-Dufresne


Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute; National Bureau of Economic Research (NBER)

Robert S. Goldstein


University of Minnesota - Twin Cities; National Bureau of Economic Research (NBER)

November 5, 2013

AFA 2013 San Diego Meetings Paper

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.

Number of Pages in PDF File: 62

Keywords: Dividend Strips, Term Structure or Risk Premia

JEL Classification: G12

working papers series





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Date posted: March 19, 2012 ; Last revised: March 8, 2014

Suggested Citation

Belo, Frederico and Collin-Dufresne, Pierre and Goldstein, Robert S., Dividend Dynamics and the Term Structure of Dividend Strips (November 5, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2024235 or http://dx.doi.org/10.2139/ssrn.2024235

Contact Information

Frederico Belo
University of Minnesota ( email )
19th Avenue South
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Pierre Collin-Dufresne
Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute ( email )
Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
CH-1015 Lausanne
Switzerland
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robert S. Goldstein (Contact Author)
University of Minnesota - Twin Cities ( email )
420 Delaware St. SE
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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