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Implied dividend volatility and expected growth

Author

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

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

  • Gormsen, Niels J. & Koijen, Ralph S.J. & Martin, Ian W.R., 2021. "Implied dividend volatility and expected growth," LSE Research Online Documents on Economics 127796, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:127796
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    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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