Citation

Discussion Paper Details

Please find the details for DP3507 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Expected Returns and Expected Dividend Growth

Author(s): Martin Lettau and Sydney C. Ludvigson

Publication Date: August 2002

Keyword(s): cointegration, consumption and dividend growth

Programme Area(s): Financial Economics

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 US stock market, despite the failure of the dividend-price ratio to uncover such variation. In addition, these dividend forecasts are found to co-vary 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 co-vary 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3507

Bibliographic Reference

Lettau, M and Ludvigson, S. 2002. 'Expected Returns and Expected Dividend Growth'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3507