Equity Duration and Predictability

51 Pages Posted: 20 Feb 2020 Last revised: 3 Aug 2020

See all articles by Benjamin Golez

Benjamin Golez

University of Notre Dame

Peter Koudijs

Stanford GSB; National Bureau of Economic Research (NBER)

Date Written: January 14, 2020

Abstract

One of the most puzzling findings in asset pricing is that expected returns dominate variation in the dividend-to-price ratio, leaving little room for dividend growth rates. Even more puzzling is that this dominance only emerged after 1945. We develop a present value model to argue that a general increase in equity duration can explain these findings. As cash flows to investors accrue further into the future, shocks to highly persistent expected returns become relatively more important than shocks to growth rates. We provide supportive empirical evidence from dividend strips, the time-series, and the cross-section of stocks.

Keywords: duration, dividend-to-price ratio, return predictability, dividend growth predictability

JEL Classification: G12, G17, N2

Suggested Citation

Golez, Benjamin and Koudijs, Peter, Equity Duration and Predictability (January 14, 2020). Available at SSRN: https://ssrn.com/abstract=3519246 or http://dx.doi.org/10.2139/ssrn.3519246

Benjamin Golez (Contact Author)

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Peter Koudijs

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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