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Variance decomposition of stock returns and dividend imputation system

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  • Ping Wu

Abstract

The relative contribution to stock price volatility of news in expected future dividends and in expected future returns in Australia is studied. The effect of the dividend imputation tax system on such contribution is investigated. It is found that news in expected future returns contributes more to price volatility in recent observations. Compared to an economy under the classical tax system such as the US, the correlation between the news about dividends and the news about returns is substantially negatively higher under the imputation system. This may be explained by a stronger financial signalling effect of franked dividend news under such a system.

Suggested Citation

  • Ping Wu, 1999. "Variance decomposition of stock returns and dividend imputation system," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 539-543.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:6:p:539-543
    DOI: 10.1080/096031099331998
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    References listed on IDEAS

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    1. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
    2. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    3. Henry, O.T.J., 1995. "A Variance Decomposition for the Excess Return on Australian Stocks," Department of Economics - Working Papers Series 497, The University of Melbourne.
    4. repec:bla:jfinan:v:43:y:1988:i:3:p:661-76 is not listed on IDEAS
    5. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-386.
    6. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    7. Campbell, John Y & Ammer, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March.
    8. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    9. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
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    Cited by:

    1. Allen, D.E & Yang, W, 2004. "Do UK stock prices deviate from fundamentals?," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 64(3), pages 373-383.

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