Endogenous Dividend Dynamics and the Term Structure of Dividend Strips

59 Pages Posted: 13 Oct 2012

See all articles by Frederico Belo

Frederico Belo

INSEAD; University of Minnesota; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Robert S. Goldstein

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

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Date Written: October 2012

Abstract

Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend dynamics with processes that are derived endogenously from capital structure policies that generate stationary leverage ratios. Under this policy, shareholders are being forced to divest (invest) when leverage is low (high), which shifts risk from long-horizon to short-horizon dividend strips. This framework also generates stock volatility that is higher than long-horizon dividend volatility, even with constant market prices of risk.

Suggested Citation

Belo, Frederico and Collin-Dufresne, Pierre and Goldstein, Robert S., Endogenous Dividend Dynamics and the Term Structure of Dividend Strips (October 2012). NBER Working Paper No. w18450, Available at SSRN: https://ssrn.com/abstract=2161197

Frederico Belo (Contact Author)

INSEAD ( email )

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Pierre Collin-Dufresne

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National Bureau of Economic Research (NBER)

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Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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National Bureau of Economic Research (NBER)

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