Working Paper: CEPR ID: DP14875
Authors: Niels Joachim Gormsen; Ralph Koijen
Abstract: We use data from the aggregate stock market and dividend futures to quantify how investors’ expectations about economic growth evolve across horizons in response to the coronavirus outbreak and subsequent policy responses until June 2020. Dividend futures, whichare claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expectedgrowth using a forecasting model. We show how the actual forecast and the bound evolve overtime. As of June 8, our forecast of annual growth in dividends is down 9% in the US and14% in the EU compared to January 1, and our forecast of GDP growth is down by 2.0% inthe US and 3.1% in the EU. The lower bound on the change in expected dividends is -18% inthe US and -25% in the EU at the 2-year horizon. News about fiscal stimulus around March24 boosts the stock market and long-term growth but did little to increase short-term growthexpectations. Expected dividend growth has improved since April 1 in both the US and theEU. We conclude by developing and estimating a simple model of the crisis to understand thejoint dynamics of short-term dividend futures, stock markets, and bond markets.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiscal stimulus news (E62) | stock market prices (G10) |
| fiscal stimulus news (E62) | long-term growth expectations (D25) |
| stock market prices (G10) | expected dividend growth (G35) |
| expected dividend growth (G35) | GDP growth forecasts (F17) |
| stock market prices (G10) | expected annual growth in dividends (G35) |