Dividend Risk and the Cross-Section of Equity Risk Premia

Posted: 30 Nov 2014

Date Written: November 28, 2014


I study a novel data set of short-term dividend futures contracts for individual stocks. I combine this data with dividend forecasts from equity research analysts to construct a model-free measure of short-term equity risk premia. I provide the first description of the cross-section of risk premia on short-maturity dividend claims. My data on risk premia for cash flows at a specific horizon (one to two years) provide a more tractable setting for understanding the differences in asset pricing across firms compared to standard equity returns, which mixes risk premia for cash flows at infinitely many maturities. The first empirical fact that emerges is a strong positive association between dividend risk and risk premia for short maturity claims. This contrasts with well-known "low risk" anomalies for standard equity. Specifically, I find that firms with high dividend volatility have (i) higher risk premia, (ii) a strongly pro-cyclical slope in their term structure of risk premia, and (iii) an inverse risk-return relation in realized stock returns. Lastly, I develop an asset-pricing model with heterogeneity in dividend volatility and time-varying market price of risk that explains my empirical results.

Keywords: equity risk premium, dividend prices, payout policy, asset pricing models

JEL Classification: G10, G12, G13, G35

Suggested Citation

Picca, Antonio, Dividend Risk and the Cross-Section of Equity Risk Premia (November 28, 2014). Available at SSRN: https://ssrn.com/abstract=2531818

Antonio Picca (Contact Author)

Goldman Sachs Group, Inc. ( email )

85 Broad Street
New York, NY 10004
United States

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