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The Dividend Term Structure

Published online by Cambridge University Press:  08 May 2019

Jac Kragt ,
Frank de Jong  and
Joost Driessen
Jac Kragt*
Affiliation:
Kragt, [email protected]
Frank de Jong
Affiliation:
de Jong, [email protected]
Joost Driessen
Affiliation:
Driessen, [email protected], Tilburg University
*
Kragt (corresponding author), [email protected]
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Abstract

We estimate a model for the term structure of discounted risk-adjusted dividend growth using prices of dividend futures for the Eurostoxx 50. A 2-factor model capturing short-term mean reversion within a year and a medium-term component reverting at the business-cycle horizon gives an excellent fit of these prices. Hence, investors update the valuation of dividends beyond the business cycle only to a limited degree. The 2-factor model, estimated on dividend futures data only, explains a large part of observed daily stock market returns. We also show that the 2 latent factors are related to various economic and financial variables.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 3 , May 2020 , pp. 829 - 867
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank Riddhi Prasad and Salil Aggarwal at Deutsche Bank, Christian Mueller-Glissmann at Goldman Sachs, and Stanislas Bourgois at Credit Suisse for providing over-the-counter (OTC) dividend-swap data. We thank Hendrik Bessembinder (the editor), Frederico Belo, Adlai Fisher, Andras Fulop, Peter Schotman, Mikhail Simutin (the referee), Bas Werker, and seminar participants at the 2015 Society for Financial Studies (SFS) Cavalcade, the 2016 American Finance Association (AFA) Meetings, and ESSEC Business School for their useful comments, and Andreas Rapp for a comparative analysis.

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