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Variance matters (in stochastic dividend discount models)

Author

Listed:
  • Arianna Agosto
  • Enrico Moretto

Abstract

Stochastic dividend discount models (Hurley and Johnson in Financ Anal J 50–54. http://www.jstor.org/stable/4479761 , 1994 , J Portf Manag 27–31. doi: 10.3905/jpm.1998.409658 , 1998 ; Yao in J Portf Manag 99–103. doi: 10.3905/jpm.1997.409618 , 1997 ) present expressions for the expected value of stock prices when future dividends, periodically received by shareholders as a reward for their risky investment, evolve through time in a Markovian setting by the means of a discretely distributed random rate of growth. Such result extends and makes more flexible the classical textbook formula for stock prices known as Gordon model. This paper introduces a closed-form expression for the variance of random stock prices, determines how their variance is affected by the variance of the dividend rate of growth, establishes that, in this framework, the dividend process is non-stationary, and perform a simple econometric analysis applying real market data. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Arianna Agosto & Enrico Moretto, 2015. "Variance matters (in stochastic dividend discount models)," Annals of Finance, Springer, vol. 11(2), pages 283-295, May.
    • Handle: RePEc:kap:annfin:v:11:y:2015:i:2:p:283-295
    DOI: 10.1007/s10436-014-0257-6
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    References listed on IDEAS

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    1. Dominique Guegan & Wayne Tarrant, 2012. "On the Necessity of Five Risk Measures," Post-Print halshs-00721339, HAL.
    2. Dominique Guégan & Wayne Tarrant, 2012. "On the necessity of five risk measures," Annals of Finance, Springer, vol. 8(4), pages 533-552, November.
    3. repec:hal:wpaper:halshs-00721339 is not listed on IDEAS
    4. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    5. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    6. Dominique Guegan & Wayne Tarrant, 2012. "On the Necessity of Five Risk Measures," PSE-Ecole d'économie de Paris (Postprint) halshs-00721339, HAL.
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    Citations

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    Cited by:

    1. Guglielmo D'Amico & Riccardo De Blasis, 2020. "A review of the Dividend Discount Model: from deterministic to stochastic models," Papers 2001.00465, arXiv.org.
    2. Arianna Agosto & Alessandra Mainini & Enrico Moretto, 2019. "Stochastic dividend discount model: covariance of random stock prices," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(3), pages 552-568, July.
    3. Guglielmo D'Amico, 2016. "Generalized semi-Markovian dividend discount model: risk and return," Papers 1605.02472, arXiv.org.
    4. Aziz Issaka & Indranil SenGupta, 2017. "Analysis of variance based instruments for Ornstein–Uhlenbeck type models: swap and price index," Annals of Finance, Springer, vol. 13(4), pages 401-434, November.
    5. Vlad Stefan Barbu & Guglielmo D’Amico & Riccardo Blasis, 2017. "Novel advancements in the Markov chain stock model: analysis and inference," Annals of Finance, Springer, vol. 13(2), pages 125-152, May.
    6. Guglielmo D’Amico & Ada Lika & Filippo Petroni, 2019. "Change point dynamics for financial data: an indexed Markov chain approach," Annals of Finance, Springer, vol. 15(2), pages 247-266, June.
    7. Arianna Agosto & Alessandra Mainini & Enrico Moretto, 2016. "Covariance of random stock prices in the Stochastic Dividend Discount Model," Papers 1609.03029, arXiv.org, revised Apr 2017.
    8. Battulga Gankhuu, 2022. "Augmented Dynamic Gordon Growth Model," Papers 2201.06012, arXiv.org, revised Aug 2023.

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    More about this item

    Keywords

    Equity valuation; Stochastic dividend discount models ; Non-stationarity of stochastic dividend processes; G12; G32;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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