The Predictive Power of the Dividend Risk Premium

Journal of Financial and Quantitative Analysis, Forthcoming

65 Pages Posted: 11 May 2019

See all articles by Davide E. Avino

Davide E. Avino

University of Liverpool; Financial Mathematics and Computation Cluster

Andrei Stancu

University of East Anglia (UEA) - Norwich Business School

Chardin Wese Simen

University of Liverpool Management School

Date Written: April 12, 2019

Abstract

We show that the dividend growth rate implied by the options market is informative about (i) the expected dividend growth rate and (ii) the expected dividend risk premium. We model the expected dividend risk premium and explore its implications for the predictability of dividend growth and stock market returns. Correcting for the expected dividend risk premium strengthens the evidence of dividend growth and stock market return predictability both in- and out-of-sample. Economically, a market timing investor who accounts for the time varying expected dividend risk premium realizes an additional utility gain of 2.02 % per year.

Keywords: Dividend risk premium, dividend strip, predictability, present value model

JEL Classification: C22, C53, G12, G13, G17

Suggested Citation

Avino, Davide E. and Stancu, Andrei and Wese Simen, Chardin, The Predictive Power of the Dividend Risk Premium (April 12, 2019). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3370868

Davide E. Avino

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Financial Mathematics and Computation Cluster

Dublin
Ireland

Andrei Stancu

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

Chardin Wese Simen (Contact Author)

University of Liverpool Management School ( email )

Management School
University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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