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Dividend derivatives

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  • R. S. Tunaru

Abstract

Dividend derivatives are not simply a by-product of equity derivatives. They constitute a distinct growing market and an entire suite of dividend derivatives are offered to investors. In this paper, we look at two potential models for equity index dividends and discuss their theoretical and practical merits. The main results emerge from a downward jump-diffusion model with beta distributed jumps and a stochastic logistic diffusion model, both able to capture the particular dynamics observed for dividends and cum-dividends, respectively, in the market. Smile calibration results are discussed with market data on the Dow Jones Euro STOXX50 DVP®$ ^\circledR $ dividend index for futures and European call and put options.

Suggested Citation

  • R. S. Tunaru, 2018. "Dividend derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 18(1), pages 63-81, January.
    • Handle: RePEc:taf:quantf:v:18:y:2018:i:1:p:63-81
    DOI: 10.1080/14697688.2017.1322218
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    Cited by:

    1. Ed-Dafali, Slimane & Patel, Ritesh & Iqbal, Najaf, 2023. "A bibliometric review of dividend policy literature," Research in International Business and Finance, Elsevier, vol. 65(C).
    2. Aşty Al-Jaaf, 2022. "Dividend predictability and higher moment risk premia," Journal of Asset Management, Palgrave Macmillan, vol. 23(2), pages 83-99, March.
    3. Damir Filipovi'c & Sander Willems, 2018. "A Term Structure Model for Dividends and Interest Rates," Papers 1803.02249, arXiv.org, revised May 2020.
    4. Damir Filipović & Sander Willems, 2020. "A term structure model for dividends and interest rates," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1461-1496, October.
    5. Sander Willems, 2019. "Linear Stochastic Dividend Model," Papers 1908.05850, arXiv.org, revised Aug 2019.
    6. Quaye, Enoch & Tunaru, Radu, 2022. "The stock implied volatility and the implied dividend volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    7. Tao Pang & Katherine Varga, 2019. "Portfolio Optimization for Assets with Stochastic Yields and Stochastic Volatility," Journal of Optimization Theory and Applications, Springer, vol. 182(2), pages 691-729, August.

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