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The Predictive Power of the Dividend Risk Premium

Published online by Cambridge University Press:  16 September 2020

Davide E. Avino ,
Andrei Stancu  and
Chardin Wese Simen Open the ORCID record for Chardin Wese Simen [Opens in a new window]
Davide E. Avino
Affiliation:
University of Liverpool Management [email protected]
Andrei Stancu
Affiliation:
University of East Anglia Norwich Business [email protected]
Chardin Wese Simen*
Affiliation:
University of Liverpool Management School
*
[email protected] (corresponding author)
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Abstract

We show that the dividend growth rate implied by the options market is informative about i) the expected dividend growth rate and ii) the expected dividend risk premium. We model the expected dividend risk premium and explore its implications for the predictability of dividend growth and stock market returns. Correcting for the expected dividend risk premium strengthens the evidence for the predictability of dividend growth and stock market returns both in and out of sample. Economically, a market-timing investor who accounts for the time-varying expected dividend risk premium realizes an additional utility gain of 2.02% per year.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2843 - 2869
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to Jennifer Conrad (the editor) and Paulo Maio (the reviewer) for constructive comments and suggestions. We are also grateful to Carol Alexander, Nikolaos Antypas, Mascia Bedendo, Maria Boutchkova, Michael Brennan, Chris Brooks, Mike Clements, Olivier Darné, Alfonso Dufour, Carlo Favero, Benjamin Golez, Ranko Jelic, Andreas Kaeck, Andrew Karolyi, Alex Kostakis, Miriam Marra, Michael McKenzie, Alexander Mihailov, Tony Moore, Ogonna Nneji, Ioannis Oikonomou, Carlton-James Osakwe (NFA Discussant), Bradley Paye, Benoît Sévi, Radu Stancu, Simone Varotto, Fang Xu, Yeqin Zheng, and Lillian Zhu and seminar participants at the 2015 Welsh Accounting & Finance Colloquium, the Midwest Econometrics Group, the International Capital Market Association (ICMA) Centre, the University of Edinburgh Business School, the Université de Nantes (LEMNA), the University of Reading (Economics), the University of Sussex, and the Northern Finance Association for helpful comments and discussions. Part of this research project was completed when Wese Simen visited Leibniz University Hannover.

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