A Model-Free Term Structure of U.S. Dividend Premiums
56 Pages Posted: 4 Aug 2018 Last revised: 29 May 2019
Date Written: April 23, 2019
We construct a model-free term structure of dividend risk premiums from option prices and aggregate analyst forecasts. Applying the method to 2004-2017 U.S. data, we find it is hump-shaped. Its level increases in business cycle contractions and decreases during expansions. The on average negative dividend term premium steepens in contractions and flattens in expansions, driven by strong variations in short-horizon dividend premiums. Buying the next year of S&P 500 dividends whenever the one-year dividend risk premium is positive has earned twice the Sharpe ratio of the index.
Keywords: Dividend Risk Premium, Dividend Term Structure, Dividend Growth
JEL Classification: G12
Suggested Citation: Suggested Citation