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The term structure of implied dividend yields and expected returns

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  • Bilson, John F.O.
  • Kang, Sang Baum
  • Luo, Hong

Abstract

This paper proposes a new dividend-based S&P 500 Index return predictor, the implied dividend yield term structure (IDYTS). We show that the IDYTS is a “cleaner” predictor than its conventional counterpart, the dividend price ratio (DP), in that the expected return is a linear combination of the level and slope of the term structure. Exploiting non-arbitrage relationships and the forward-looking nature of the options market, we estimate the IDYTS and investigate its index return predictability. The IDYTS outperforms the DP in predictive regressions, and the optimal IDYTS portfolio, constructed by using the IDYTS in a predictive regression, stochastically dominates and yields a higher Sharpe ratio than the DP portfolio.

Suggested Citation

  • Bilson, John F.O. & Kang, Sang Baum & Luo, Hong, 2015. "The term structure of implied dividend yields and expected returns," Economics Letters, Elsevier, vol. 128(C), pages 9-13.
    • Handle: RePEc:eee:ecolet:v:128:y:2015:i:c:p:9-13
    DOI: 10.1016/j.econlet.2015.01.003
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    References listed on IDEAS

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    Cited by:

    1. Yao Wang & Jingmei Zhao & Qing Li & Xiangyu Wei, 2024. "Considering momentum spillover effects via graph neural network in option pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(6), pages 1069-1094, June.
    2. Svetlozar Rachev & Frank J. Fabozzi & Boryana Racheva-Iotova & Abootaleb Shirvani, 2017. "Option Pricing with Greed and Fear Factor: The Rational Finance Approach," Papers 1709.08134, arXiv.org, revised Mar 2020.
    3. Quaye, Enoch & Tunaru, Radu, 2022. "The stock implied volatility and the implied dividend volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).

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    More about this item

    Keywords

    Predictive regression; Dividend yield; Dividend price ratio; Sharpe ratio; Stochastic dominance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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