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The Power Law and Dividend Yields

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  • Lüders, Erik
  • Lüders-Amann, Inge
  • Schröder, Michael

Abstract

Recent research suggests that the power law is one of the most universal laws in nature and it also seems to work quite fine in economics and finance. In this paper we show that the power law explains extremely well the relationship between the value of broad-based market indices and their dividends. We also show that this relationship is consistent with declining relative risk aversion of the representative investor. Hence, the power law has a solid economic foundation. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 04-51.

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Date of creation: 2004
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Handle: RePEc:zbw:zewdip:2189

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Keywords: Power law; stock prices; dividends; co-integration;

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  12. Guenter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel," Finance 9904004, EconWPA.
  13. Guntar Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "When are Options Overpriced? The Black-Scholes Model and Alternative Characterizations of the Pricing Kernel," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-003, New York University, Leonard N. Stern School of Business-.
  14. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  15. Lee, Bong-Soo, 1995. "The Response of Stock Prices to Permanent and Temporary Shocks to Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 1-22, March.
  16. Inder, Brett, 1993. "Estimating long-run relationships in economics : A comparison of different approaches," Journal of Econometrics, Elsevier, vol. 57(1-3), pages 53-68.
  17. West, Kenneth D, 1988. "Dividend Innovations and Stock Price Volatility," Econometrica, Econometric Society, vol. 56(1), pages 37-61, January.
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