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Risk, Return and Dividends

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  • Andrew Ang
  • Jun Liu

Abstract

We characterize the joint dynamics of dividends, expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, together with dividends, the stock volatility process fully determines the dynamics of the expected return and the price-dividend ratio. By parameterizing one or more of expected returns, volatility, or prices, common empirical specifications place strong, and sometimes counter-factual, restrictions on the dynamics of the other variables. Our relations are useful for understanding the risk-return trade-off, as well as characterizing the predictability of stock returns.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12843.

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Date of creation: Jan 2007
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Publication status: published as Ang, Andrew & Liu, Jun, 2007. "Risk, return, and dividends," Journal of Financial Economics, Elsevier, vol. 85(1), pages 1-38, July.
Handle: RePEc:nbr:nberwo:12843

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Cited by:
  1. Tom Engsted & Thomas Q. Pedersen, 2009. "The dividend-price ratio does predict dividend growth: International evidence," CREATES Research Papers 2009-36, School of Economics and Management, University of Aarhus.
  2. Chen, Long, 2009. "On the reversal of return and dividend growth predictability: A tale of two periods," Journal of Financial Economics, Elsevier, Elsevier, vol. 92(1), pages 128-151, April.
  3. Tim Bollerslev & Hao Zhou, 2006. "Expected stock returns and variance risk premia," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-11, Board of Governors of the Federal Reserve System (U.S.).
  4. Lustig, Hanno & van Nieuwerburgh, Stijn & Verdelhan, Adrien, 2012. "The Wealth-Consumption Ratio," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9022, C.E.P.R. Discussion Papers.
  5. Juho Kanniainen & Robert Pich\'e, 2012. "Stock Price Dynamics and Option Valuations under Volatility Feedback Effect," Papers 1209.4718, arXiv.org.
  6. Kanniainen, Juho & Piché, Robert, 2013. "Stock price dynamics and option valuations under volatility feedback effect," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 392(4), pages 722-740.
  7. Pollet, Joshua M. & Wilson, Mungo, 2010. "Average correlation and stock market returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(3), pages 364-380, June.

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