Expected Returns and Expected Dividend Growth
64 Pages Posted: 13 Nov 2008
There are 7 versions of this paper
Expected Returns and Expected Dividend Growth
Expected Returns and Expected Dividend Growth
Expected Returns and Expected Dividend Growth
Expected Returns and Expected Dividend Growth
Expected Returns and Expected Dividend Growth
Expected Returns and Expected Dividend Growth
Date Written: October 2002
Abstract
We develop a consumption-based present value relation that is a function of future dividend growth. Using data on aggregate consumption and measures of the dividend payments from aggregate wealth, we show that changing forecasts of dividend growth make an important contribution to fluctuations in the U.S. stock market, despite the failure of the dividend-price ratio to uncover such variation. In addition, these dividend forecasts are found to covary with changing forecasts of excess stock returns. The variation in expected dividend growth we uncover is positively correlated with "business cycle" variation in expected returns, and the results suggest that a substantial fraction of the variation in expected dividend growth is common to variation in expected excess returns. Movements in expected dividend growth that are entirely common to movements in expected returns have no effect on the log dividend-price ratio. An implication of these findings is that the log dividend-price ratio will have difficulty predicting both dividend growth and excess returns at business cycle frequencies. Such a failure of predictive power is not an indication that risk-premia are constant, however. On the contrary, the results presented here imply that the log dividend-price ratio will have difficulty revealing business cycle variation in both the equity risk-premium and expected dividend growth precisely because expected returns fluctuate at those frequencies, and covary with changing forecasts of dividend growth. The findings imply that both the market risk-premium and expected dividend growth vary considerably more than what can be revealed using the log dividend-price ratio alone as a predictive variable.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson