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Risk, Return and Dividends

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Author Info
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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Handle: RePEc:nbr:nberwo:12843

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Hanno Lustig & Stijn Van Nieuwerburgh & Adrien Verdelhan, 2008. "The Wealth-Consumption Ratio," NBER Working Papers 13896, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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