"Risk, Return, and Dividends"
Journal of Financial Economics,
Volume: 85 | Issue: 1 | Pages: 1-38
Publication type: Journal article
We characterize the joint dynamics of dividends, expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, together with dividends, the stock volatility process fully determines the dynamics of the expected return and the price-dividend ratio. By parameterizing one or more of expected returns, volatility, or prices, common empirical specifications place strong, and sometimes counter-factual, restrictions on the dynamics of the other variables. Our relations are useful for understanding the risk-return trade-off, as well as characterizing the predictability of stock returns.
Above is a pre-print version of the article. The final version may be found at http://dx.doi.org/10.1016/j.jfineco.2007.01.001
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