Expected returns and expected dividend growth

Expected returns and expected dividend growth We investigate a consumption-based present-value relation that is a function of future dividend growth and find that changing forecasts of dividend growth are an important feature of the post-war U.S. stock market, despite the failure of the dividend–price ratio to uncover such variation. In addition, dividend forecasts are found to covary with changing forecasts of excess stock returns over business cycle frequencies. This covariation is important because positively correlated fluctuations in expected dividend growth and expected returns have offsetting effects on the log dividend–price ratio. The market risk premium and expected dividend growth thus vary considerably more than is apparent using the log divided–price ratio alone as a predictive variable. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Expected returns and expected dividend growth

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Publisher
Elsevier
Copyright
Copyright © 2005 Elsevier B.V.
ISSN
0304-405x
DOI
10.1016/j.jfineco.2004.05.008
Publisher site
See Article on Publisher Site

Abstract

We investigate a consumption-based present-value relation that is a function of future dividend growth and find that changing forecasts of dividend growth are an important feature of the post-war U.S. stock market, despite the failure of the dividend–price ratio to uncover such variation. In addition, dividend forecasts are found to covary with changing forecasts of excess stock returns over business cycle frequencies. This covariation is important because positively correlated fluctuations in expected dividend growth and expected returns have offsetting effects on the log dividend–price ratio. The market risk premium and expected dividend growth thus vary considerably more than is apparent using the log divided–price ratio alone as a predictive variable.

Journal

Journal of Financial EconomicsElsevier

Published: Jun 1, 2005

References

  • A variance decomposition for stock returns
    Campbell, J.Y.
  • Asset Pricing
    Cochrane, J.H.
  • Understanding trend and cycle in asset values: reevaluating the wealth effect on consumption
    Lettau, M.; Ludvigson, S.C.
  • Predictable stock returns: the role of small sample bias
    Nelson, C.C.; Kim, M.J.
  • Predictive regressions
    Stambaugh, R.F.
  • Long-horizon regressions: theoretical results and applications
    Valkanov, R.

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