Expected Returns and Dividend Growth Rates Implied by Derivative Markets

Review of Financial Studies, 2014 (27), 790-822

68 Pages Posted: 23 Sep 2008 Last revised: 7 Dec 2015

Date Written: November 19, 2013


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.

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

JEL Classification: G12, G13

Suggested Citation

Golez, Benjamin, Expected Returns and Dividend Growth Rates Implied by Derivative Markets (November 19, 2013). Review of Financial Studies, 2014 (27), 790-822 , Available at SSRN: https://ssrn.com/abstract=1271607 or http://dx.doi.org/10.2139/ssrn.1271607

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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