Dividend Dynamics, Learning, and Expected Stock Index Returns

72 Pages Posted: 14 Sep 2015

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 2015

Abstract

We present a latent variable model of dividends that predicts, out-of-sample, 39.5% to 41.3% of the variation in annual dividend growth rates between 1975 and 2016. Further, when learning about dividend dynamics is incorporated into a long-run risks model, the model predicts, out-of-sample, 25.3% to 27.1% of the variation in annual stock index returns over the same time horizon, and learning contributes approximately half of the predictability in returns. These findings support the view that both investors' aversion to long-run risks and their learning about these risks are important in determining the stock index prices and expected returns.

Suggested Citation

Jagannathan, Ravi and Liu, Binying, Dividend Dynamics, Learning, and Expected Stock Index Returns (September 2015). NBER Working Paper No. w21557. Available at SSRN: https://ssrn.com/abstract=2660016

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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