Risk, Mispricing, and Asset Allocation: Conditioning on Dividend Yield

57 Pages Posted: 2 Dec 2001

See all articles by Jay A. Shanken

Jay A. Shanken

Emory University - Goizueta Business School; National Bureau of Economic Research (NBER)

Ane Tamayo

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: October 24, 2001

Abstract

In the asset pricing literature, time-variation in market expected excess return captured by financial ratios like dividend yield is typically viewed as a reflection of either changing risk, related to the business cycle, or irrational mispricing. Extending the work on asset allocation and dividend yield by Kandel and Stambaugh (1996) to accommodate variation in risk as well as expected return, we develop Bayesian methods to examine the interaction between the data and an investor's initial beliefs about the sources of return predictability. Although results vary with the subperiod examined, different views on the relative importance of these factors can have important implications for asset allocation between a stock index and a riskless asset. In general, however, the simple risk/return model of Merton (1980) explains very little of the yield-related return predictability observed.

Suggested Citation

Shanken, Jay A. and Tamayo, Ane Miren, Risk, Mispricing, and Asset Allocation: Conditioning on Dividend Yield (October 24, 2001). London Business School Accounting Subject Area No. 032; Simon Business School Working Paper No. FR 01-21; AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=292747 or http://dx.doi.org/10.2139/ssrn.292747

Jay A. Shanken (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4772 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ane Miren Tamayo

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)

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