Discount Rates and Cash Flows: A Local Projection Approach

79 Pages Posted: 22 May 2019 Last revised: 7 Mar 2024

Date Written: February 28, 2024

Abstract

We develop flexible local projections to quantify the relative contributions of expected discount rates and cash flows to the variation of dividend yields. Local projections enable the incorporation of large information sets, the use of monthly data along with annual data, and to consider time variation in the dividend yield decomposition. By also expanding the set of state variables and allowing for time-varying parameters, we find that while the variation of expected discount rates remains the strongly dominant contributor to market volatility and the contribution of expected cash flows is rather small.

Keywords: dividend yield, decomposition, dividend growth, local projections

JEL Classification: C32, G12

Suggested Citation

Lof, Matthijs and Nyberg, Henri, Discount Rates and Cash Flows: A Local Projection Approach (February 28, 2024). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3372138 or http://dx.doi.org/10.2139/ssrn.3372138

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/matthijslof/

Henri Nyberg

University of Turku ( email )

Turku, 20014
Finland

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