Long-Run Factors and Fluctuations in Dividend/Price

58 Pages Posted: 14 Feb 2009 Last revised: 23 Dec 2019

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Arie Eskenazi Gozluklu

University of Warwick

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: June 29, 2009

Abstract

The dynamic dividend growth model linking the log dividend yield to future expected dividend growth and stock market returns has been extensively used in the literature for forecasting stock returns. The empirical evidence on the performance of the model is mixed as its strength varies with the sample choice. This model is derived on the assumption of stationary log dividend-price ratio. The empirical validity of such hypothesis has been challenged in the recent literature (Lettau&Van Nieuwerburgh, 2008) with strong evidence on a time varying mean, due to breaks, in this financial ratio. In this paper, we show that the slowly evolving mean toward which the dividend price ratio is reverting is driven by a demographic factor and a technological trend. We also show that an empirical model using information in long-run factors overperforms virtually all alternative models proposed in the literature within the framework of the dynamic dividend growth model. Finally, we exploit the exogeneity and predictability of the demographic factor to simulate the equity risk premium up to 2050.

Keywords: error correction, long run predictability, equity premium, demographics

JEL Classification: G14, G19, C10, C11, C22, C53

Suggested Citation

Favero, Carlo A. and Gozluklu, Arie Eskenazi and Tamoni, Andrea, Long-Run Factors and Fluctuations in Dividend/Price (June 29, 2009). EFA 2009 Bergen Meetings Paper; WBS Finance Group Research Paper No. 110. Available at SSRN: https://ssrn.com/abstract=1343065 or http://dx.doi.org/10.2139/ssrn.1343065

Carlo A. Favero (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Arie Eskenazi Gozluklu

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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