Dividend Variability and Stock Market Swings

S-95-22

37 Pages Posted: 1 Feb 1996

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Date Written: August 1995

Abstract

This paper examines the extent to which swings in stock prices can be related to variations in the discounted value of expected future dividends when investors face uncertainty about their future behavior. First, I present evidence of instability in time series behavior of dividends and discount rates over the past 120 years and show that it can be well represented by switching processes. I then develop a model for the log dividend-price ratio in which investors rationally anticipate the future switches in the dividend and discount rate processes. Estimates of the model reveal that changing forecasts of future dividend growth account for more than 90% of the predictable variations in dividend- prices. The estimates also imply that process switches contribute significantly to the apparent "excess volatility" of dividend-prices and the predictability of stock returns.

JEL Classification: E44, G12

Suggested Citation

Evans, Martin D.D., Dividend Variability and Stock Market Swings (August 1995). S-95-22, Available at SSRN: https://ssrn.com/abstract=7156 or http://dx.doi.org/10.2139/ssrn.7156

Martin D.D. Evans (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
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