The Predictive Power of the Dividend Risk Premium
Journal of Financial and Quantitative Analysis, Forthcoming
65 Pages Posted: 11 May 2019
Date Written: April 12, 2019
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
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