The Asset Pricing Implications of Dividend Volatility

Management Science, 2013, 59(9): 2036-2055

35 Pages Posted: 13 May 2011 Last revised: 26 Feb 2016

See all articles by Yan Li

Yan Li

Temple University - Fox School of Business and Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: May 13, 2011

Abstract

This paper establishes dividend volatility as a fundamental risk metric that prices assets. We theoretically incorporate dividend volatility clustering into a model in which narrow-framing investors are loss averse over fluctuations in the value of their investments. Our model shows that dividend volatility positively predicts future asset returns, with the predictive power increasing with the forecasting horizon; our model also sheds light on a variety of other asset-pricing phenomena. We further provide supporting empirical evidence that dividend volatility is indeed priced in the data. More specifically, aggregate dividend volatility predicts and is predicted by aggregate price-to-dividend ratios; aggregate dividend volatility predicts future aggregate market returns; and dividend volatility of portfolios sorted by size, book-to-market ratios, and past returns predicts future portfolio-level returns respectively.

Keywords: asset pricing, dividend volatility, loss aversion, narrow framing, return predictability, volatility clustering

JEL Classification: G11, G12

Suggested Citation

Li, Yan and Yang, Liyan, The Asset Pricing Implications of Dividend Volatility (May 13, 2011). Management Science, 2013, 59(9): 2036-2055, Available at SSRN: https://ssrn.com/abstract=1840965 or http://dx.doi.org/10.2139/ssrn.1840965

Yan Li (Contact Author)

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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