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Risk, return, and dividends

  • Ang, Andrew
  • Liu, Jun

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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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 85 (2007)
Issue (Month): 1 (July)
Pages: 1-38

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Handle: RePEc:eee:jfinec:v:85:y:2007:i:1:p:1-38
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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