NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dividend Dynamics, Learning, and Expected Stock Index Returns

Ravi Jagannathan, Binying Liu

NBER Working Paper No. 21557
Issued in September 2015, Revised in December 2017
NBER Program(s):Asset Pricing

We present a latent variable model of dividends that predicts, out-of-sample, 39.5% to 41.3% of the variation in annual dividend growth rates between 1975 and 2016. Further, when learning about dividend dynamics is incorporated into a long-run risks model, the model predicts, out-of-sample, 25.3% to 27.1% of the variation in annual stock index returns over the same time horizon, and learning contributes approximately half of the predictability in returns. These findings support the view that both investors' aversion to long-run risks and their learning about these risks are important in determining the stock index prices and expected returns.

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Document Object Identifier (DOI): 10.3386/w21557

forthcoming in the Journal of Finance

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