Dividend Yield, Risk, and Mispricing: A Bayesian Analysis

London Business School Accounting Subject Area Working Paper

55 Pages Posted: 20 May 2004

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)

Date Written: May 6, 2004

Abstract

We extend Kandel and Stambaugh's (1996) work on return predictability and dividend yield to accommodate time-variation in market risk as well as expected return. Variation in risk is statistically and economically important, but most of the yield related return predictability is unrelated to risk. Differences in prior beliefs about the extent to which predictability is due to risk or mispricing can have economically significant effects on asset allocation between the market and a riskless asset. Beliefs about the risk-return tradeoff can also be important, with Merton's (1980) theoretical proportionality condition employed as a prior reference point.

Suggested Citation

Shanken, Jay A. and Tamayo, Ane Miren, Dividend Yield, Risk, and Mispricing: A Bayesian Analysis (May 6, 2004). London Business School Accounting Subject Area Working Paper, Available at SSRN: https://ssrn.com/abstract=548364 or http://dx.doi.org/10.2139/ssrn.548364

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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