Working Paper: NBER ID: w12843
Authors: Andrew Ang; Jun Liu
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend process (G35) | expected return (G17) |
| expected return (G17) | stock volatility (G17) |
| expected return (G17) | price-dividend ratio (G35) |
| stock volatility (G17) | price-dividend ratio (G35) |
| dividend process (G35) | stock volatility (G17) |
| dividend process (G35) | price-dividend ratio (G35) |