Working Paper: CEPR ID: DP16224
Authors: Suleyman Basak; Adem Atmaz
Abstract: We develop a stationary model of the aggregate stock market featuring both dividend-paying and nodividend stocks within a familiar, parsimonious consumption-based equilibrium framework. We find that such a simple feature leads to profound implications supporting several stock market empirical regularities that leading consumption-based asset pricing models have difficulty reconciling. We showthat the presence of no-dividend stocks in the stock market leads to a lower correlation between the stock market return and aggregate consumption growth rate, a non-monotonic and even a negative relation between the stock market risk premium and its volatility, and a downward sloping term structure of equity risk premia. When we quantify these effects, we find them to be economicallysignificant. We also find that no-dividend stocks command lower mean returns but have higher return volatilities and higher market betas than comparable dividend-paying stocks, consistently with empirical evidence. We provide straightforward intuition for all these results and the underlying economic mechanisms at play.
Keywords: stock market; nodividend stocks; dynamic asset pricing; incomplete information
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nodividend stocks (G35) | lower correlation between stock market returns and aggregate consumption growth rate (E21) |
| nodividend stocks (G35) | nonmonotonic and potentially negative relationship between stock market risk premium and volatility (G17) |
| nodividend stocks (G35) | downward sloping term structure of equity risk premia (G12) |