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Implied Dividend Volatility and Expected Growth

Author

Listed:
  • Niels J. Gormsen
  • Ralph S. J. Koijen
  • Ian W. R. Martin

Abstract

We study the behavior of implied dividend volatility, constructed from the prices of options on index-level dividends, during the COVID-19 pandemic. We use these data to construct a lower bound on expected excess returns on dividend claims and find that the bound moves significantly over time. However, most of the variation in dividend futures prices reflects changes in growth expectations rather than expected excess returns, making them valuable assets to uncover growth expectations. We conclude that the short-term economic outlook is uncertain and not expected to recover in the near term.

Suggested Citation

  • Niels J. Gormsen & Ralph S. J. Koijen & Ian W. R. Martin, 2021. "Implied Dividend Volatility and Expected Growth," AEA Papers and Proceedings, American Economic Association, vol. 111, pages 361-365, May.
    • Handle: RePEc:aea:apandp:v:111:y:2021:p:361-65
    DOI: 10.1257/pandp.20211065
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    References listed on IDEAS

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    1. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    2. Niels Joachim Gormsen & Ralph S J Koijen & Nikolai Roussanov, 0. "Coronavirus: Impact on Stock Prices and Growth Expectations," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 574-597.
    3. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, June.
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    7. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    8. Bansal, Ravi & Kiku, Dana & Yaron, Amir, 2012. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," Critical Finance Review, now publishers, vol. 1(1), pages 183-221, January.
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    Cited by:

    1. MORIKAWA Masayuki, 2022. "Uncertainty of Firms' Medium-term Outlook during the COVID-19 Pandemic," Discussion papers 22079, Research Institute of Economy, Trade and Industry (RIETI).
    2. Benjamin Knox & Annette Vissing-Jorgensen, 2022. "A Stock Return Decomposition Using Observables," Finance and Economics Discussion Series 2022-014, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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