The predictive power of the dividend risk premium

Davide E. Avino, Andrei Stancu, Chardin Wese Simen

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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.

Original languageEnglish
Pages (from-to)2843-2869
Number of pages27
JournalJournal of Financial and Quantitative Analysis
Volume56
Issue number8
Early online date16 Sep 2020
DOIs
Publication statusPublished - 16 Dec 2021

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