Working Paper: NBER ID: w27387
Authors: Niels J. Gormsen; Ralph S. J. 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, which are 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 expected growth using a forecasting model. We show how the actual forecast and the bound evolve over time. As of June 8, our forecast of annual growth in dividends is down 9% in the US and 14% in the EU compared to January 1, and our forecast of GDP growth is down by 2.0% in the US and 3.1% in the EU. The lower bound on the change in expected dividends is -18% in the US and -25% in the EU at the 2-year horizon. News about fiscal stimulus around March 24 boosts the stock market and long-term growth but did little to increase short-term growth expectations. Expected dividend growth has improved since April 1 in both the US and the EU. We conclude by developing and estimating a simple model of the crisis to understand the joint dynamics of short-term dividend futures, stock markets, and bond markets.
Keywords: No keywords provided
JEL Codes: E44; F3; G1; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coronavirus outbreak (F65) | downward revision of growth expectations (E66) |
| fiscal stimulus news (E62) | stock market performance (G10) |
| fiscal stimulus news (E62) | long-term growth expectations (D25) |
| expected dividend growth (G35) | GDP growth (O49) |
| expected dividend growth (G35) | recovery in investor sentiment (G41) |
| coronavirus outbreak (F65) | decline in expected dividends (G35) |