Expected Returns and Dividend Growth Rates Implied by Derivative Markets
Review of Financial Studies
2014
The dividend-price ratio is a noisy proxy for expected returns when expected dividend growth is time-varying. This paper uses a new and forward-looking measure of dividend growth extracted from S&P 500 futures and options to correct the dividend-price ratio for changes in expected dividend growth. Over January 1994 through June 2011, dividend growth implied by derivative markets reliably forecasts future dividend growth, and the corrected dividend-price ratio predicts S&P 500 returns substantially better than the standard dividend-price ratio, in-sample and out-of-sample. Time-varying expected dividend growth is important to explain price movements, especially because it is highly correlated with expected returns.
- DOI
- 10.1093/rfs/hht131
- Volume
- 27 (3)
- Pages
- 790-822
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref