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Expected Returns and Dividend Growth Rates Implied by Derivative Markets

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  • Benjamin Golez

Abstract

The dividend-price ratio is a noisy proxy for expected returns when expected dividend growth is time-varying. This paper uses a new and forward-looking measure of dividend growth extracted from S&P 500 futures and options to correct the dividend-price ratio for changes in expected dividend growth. Over January 1994 through June 2011, dividend growth implied by derivative markets reliably forecasts future dividend growth, and the corrected dividend-price ratio predicts S&P 500 returns substantially better than the standard dividend-price ratio, in-sample and out-of-sample. Time-varying expected dividend growth is important to explain price movements, especially because it is highly correlated with expected returns.

Suggested Citation

  • Benjamin Golez, 2014. "Expected Returns and Dividend Growth Rates Implied by Derivative Markets," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 790-822.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:3:p:790-822.
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    File URL: http://hdl.handle.net/10.1093/rfs/hht131
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