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Expected Returns and Expected Dividend Growth

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Author Info
Martin Lettau
Sydney Ludvigson

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Abstract

We investigate a consumption-based present value relation that is a function of future dividend growth. Using data on aggregate consumption and measures of the dividend payments from aggregate wealth, we show that changing forecasts of dividend growth make an important contribution to fluctuations in the U.S. stock market, despite the failure of the dividend-price ratio to uncover such variation. In addition, these dividend forecasts are found to covary with changing forecasts of excess stock returns. The variation in expected dividend growth we uncover is positively correlated with changing forecasts of excess returns and occurs at business cycle frequencies, those ranging from one to six years. Because positively correlated fluctuations in expected dividend growth and expected returns have offsetting affects on the log dividend-price ratio, the results imply that both the market risk-premium and expected dividend growth vary considerably more than what can be revealed using the log dividend-price ratio alone as a predictive variable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9605.

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Date of creation: Apr 2003
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Handle: RePEc:nbr:nberwo:9605

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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  1. Fama, Eugene F. & French, Kenneth R., 2001. "Disappearing dividends: changing firm characteristics or lower propensity to pay?," Journal of Financial Economics, Elsevier, vol. 60(1), pages 3-43, April. [Downloadable!] (restricted)
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  2. John H. Cochrane, 1997. "Where is the market going? Uncertain facts and novel theories," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 3-37. [Downloadable!]
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  3. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November. [Downloadable!] (restricted)
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