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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27434
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| Title: | Expected Returns and Expected Dividend Growth |
| Authors: | Lettau, Martin
Ludvigson, Sydney C. |
| Issue Date: | 31-Oct-2002 |
| Series/Report no.: | SC-AM-02-04 |
| Abstract: | We develop a consumption-based present value relation that is a function
of future dividend growth. Using data on aggregate consumption and
measures of the dividend payments from aggregate wealth, we show that
changing forecasts of dividend growth make an important contribution to
fluctuations in the U.S. stock market, despite the failure of the
dividend-price ratio to uncover such variation. In addition, these
dividend forecasts are found to covary with changing forecasts of excess
stock returns. The variation in expected dividend growth we uncover is
positively correlated with "business cycle" variation in
expected returns, and the results suggest that a substantial fraction of
the variation in expected dividend growth is common to variation in
expected excess returns. Movements in expected dividend growth that are
entirely common to movements in expected returns have no effect on the
log dividend-price ratio. An implication of these findings is that the
log dividend-price ratio will have difficulty predicting both dividend
growth and excess returns at business cycle frequencies. Such a failure
of predictive power is not an indication that risk-premia are constant,
however. On the contrary, the results presented here imply that the log
dividend-price ratio will have difficulty revealing business cycle
variation in both the equity risk-premium and expected dividend growth
precisely because expected returns fluctuate at those frequencies, and
covary with changing forecasts of dividend growth. The findings imply
that both the market risk-premium and expected dividend growth vary
considerably more than what can be revealed using the log dividend-price
ratio alone as a predictive variable. |
| URI: | http://hdl.handle.net/2451/27434 |
| Appears in Collections: | Asset Management
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