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Dividend Dynamics and the Term Structure of Dividend Strips

62 Pages Posted: 19 Mar 2012 Last revised: 8 Mar 2014

Frederico Belo

University of Minnesota; National Bureau of Economic Research (NBER)

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne; National Bureau of Economic Research (NBER)

Robert S. Goldstein

University of Minnesota - Twin Cities; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 5, 2013

Abstract

Many leading asset pricing models are specified so that the term structure of dividend volatility is either flat or upward sloping. Related, these models predict that the term structures of expected returns and volatilities on dividend strips (i.e., claims to dividends paid over a prespecified interval) are also upward sloping. However, the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their proposed dividend dynamics with processes that generate stationary leverage ratios. Under such policies, shareholders are being forced to divest (invest) when leverage is low (high), which shifts risk from long-horizon to short-horizon dividend strips. Even if discount rates are specified as constants, this mechanism also captures the "volatility puzzle'' (Shiller (1981)) in that stock return volatility is greater than long-horizon dividend volatility.

Keywords: Dividend Strips, Term Structure or Risk Premia

JEL Classification: G12

Suggested Citation

Belo, Frederico and Collin-Dufresne, Pierre and Goldstein, Robert S., Dividend Dynamics and the Term Structure of Dividend Strips (November 5, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2024235 or http://dx.doi.org/10.2139/ssrn.2024235

Frederico Belo

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert S. Goldstein (Contact Author)

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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