48 Pages Posted: 20 Jan 2007
Date Written: January 2007
We characterize the joint dynamics of dividends, expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, together with dividends, the stock volatility process fully determines the dynamics of the expected return and the price-dividend ratio. By parameterizing one or more of expected returns, volatility, or prices, common empirical specifications place strong, and sometimes counter-factual, restrictions on the dynamics of the other variables. Our relations are useful for understanding the risk-return trade-off, as well as characterizing the predictability of stock returns.
Suggested Citation: Suggested Citation
Ang, Andrew and Liu, Jun, Risk, Return and Dividends (January 2007). NBER Working Paper No. w12843. Available at SSRN: https://ssrn.com/abstract=958495