Working Paper: NBER ID: w16455
Authors: Jules H. Van Binsbergen; Michael W. Brandt; Ralph S.J. Koijen
Abstract: We recover prices of dividend strips on the aggregate stock market using data from derivatives markets. The price of a k-year dividend strip is the present value of the dividend paid in k years. The value of the stock market is the sum of all dividend strip prices across maturities. We study the properties of strips and find that expected returns, Sharpe ratios, and volatilities on short-term strips are higher than on the aggregate stock market, while their CAPM betas are well below one. Short-term strip prices are more volatile than their realizations, leading to excess volatility and return predictability.
Keywords: dividend strips; asset pricing; equity risk premium
JEL Codes: E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected returns on short-term dividend strips (G12) | higher than expected returns on aggregate stock market (G17) |
| volatility of short-term dividend strips (G19) | predictability of returns (G17) |
| short-term dividends (G35) | higher risk premium than long-term dividends (G35) |
| CAPM alpha of short-term asset returns (G12) | significantly positive (C29) |
| volatility of short-term dividend strips (G19) | higher expected returns (G12) |