Dividend Dynamics, Learning, and Expected Stock Index Returns

55 Pages Posted: 8 Sep 2015 Last revised: 2 Oct 2016

See all articles by Ravi Jagannathan

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Binying Liu

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 28, 2016

Abstract

We show that, in a frictionless and efficient market, an asset pricing model that better describes investors' behavior should better forecast stock index returns. We propose a dividend model that predicts, out-of-sample, 31.3% of the variation in annual dividend growth rates (1976-2015). Further, when learning about dividend dynamics is incorporated into a long-run risks model, the model predicts, out-of-sample, 22.4% of the variation in annual stock index returns (1976-2015). This supports the view that both investors' aversion to long-run risks and learning about these risks are important in determining asset prices and expected returns.

Keywords: Dividends, Earnings, Stock Index Returns, Learning, Early Resolution of Uncertainty, Predictability of Stock Returns, Predictability of Dividends.

JEL Classification: G10, G11, G12, G14

Suggested Citation

Jagannathan, Ravi and Liu, Binying, Dividend Dynamics, Learning, and Expected Stock Index Returns (September 28, 2016). Available at SSRN: https://ssrn.com/abstract=2657216 or http://dx.doi.org/10.2139/ssrn.2657216

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER)

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Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
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Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Binying Liu

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
4084251143 (Phone)

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