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The Power Law and Dividend Yields

  • Lüders, Erik
  • Lüders-Amann, Inge
  • Schröder, Michael

Recent research suggests that the power law is one of the most universal laws in nature and it also seems to work quite fine in economics and finance. In this paper we show that the power law explains extremely well the relationship between the value of broad-based market indices and their dividends. We also show that this relationship is consistent with declining relative risk aversion of the representative investor. Hence, the power law has a solid economic foundation.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 04-51.

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Date of creation: 2004
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Handle: RePEc:zbw:zewdip:2189
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  8. Lee, Bong-Soo, 1995. "The Response of Stock Prices to Permanent and Temporary Shocks to Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 1-22, March.
  9. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
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