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The relative pricing of European dividend futures and their predictive abilities for index returns

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  • Olaf Stotz

Abstract

We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability.

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  • Olaf Stotz, 2016. "The relative pricing of European dividend futures and their predictive abilities for index returns," The European Journal of Finance, Taylor & Francis Journals, vol. 22(15), pages 1484-1506, December.
    • Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1484-1506
    DOI: 10.1080/1351847X.2014.953701
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