NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Endogenous Dividend Dynamics and the Term Structure of Dividend Strips

Frederico Belo, Pierre Collin-Dufresne, Robert S. Goldstein

NBER Working Paper No. 18450
Issued in October 2012
NBER Program(s):   AP   CF   EFG

Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend dynamics with processes that are derived endogenously from capital structure policies that generate stationary leverage ratios. Under this policy, shareholders are being forced to divest (invest) when leverage is low (high), which shifts risk from long-horizon to short-horizon dividend strips. This framework also generates stock volatility that is higher than long-horizon dividend volatility, even with constant market prices of risk.

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Document Object Identifier (DOI): 10.3386/w18450

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