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
Date Written: May 13, 2011
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: Suggested Citation