Risk, Return and Dividends
NBER Working Paper No. 12843
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.
Published: Ang, Andrew & Liu, Jun, 2007. "Risk, return, and dividends," Journal of Financial Economics, Elsevier, vol. 85(1), pages 1-38, July.
An online appendix is available for this publication.