Dividend Dynamics, Learning, and Expected Stock Index Returns

Ravi Jagannathan, Binying Liu

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

We present a latent variable model of dividends that predicts, out-of-sample, 39.5% to 41.3% of the variation in annual dividend growth rates between 1975 and 2016. Further, when learning about dividend dynamics is incorporated into a long-run risks model, the model predicts, out-of-sample, 25.3% to 27.1% of the variation in annual stock index returns over the same time horizon, with learning contributing approximately half of the predictability in returns. These findings support the view that investors' aversion to long-run risks and their learning about these risks are important in determining stock index prices and expected returns.

Original languageEnglish (US)
Pages (from-to)401-448
Number of pages48
JournalJournal of Finance
Volume74
Issue number1
DOIs
StatePublished - Feb 1 2019

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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