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Risk, Return and Dividends

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  • Ang, Andrew
  • Liu, Jun

Abstract

We characterize the joint dynamics of expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, the stock volatility determines the expected return and the price-dividend ratio. By parameterizing one, or more, of expected returns, volatility, or prices, common empirical specifications place strong, and sometimes inconsistent, restrictions on the dynamics of the other variables. Our results are useful for understanding the risk-return trade-off, as well as characterizing the predictability of stock returns.

Suggested Citation

  • Ang, Andrew & Liu, Jun, 2005. "Risk, Return and Dividends," University of California at Los Angeles, Anderson Graduate School of Management qt1s25177n, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt1s25177n
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    Cited by:

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    5. Kanniainen, Juho & Piché, Robert, 2013. "Stock price dynamics and option valuations under volatility feedback effect," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(4), pages 722-740.
    6. Nahida Akter & Ashadun Nobi, 2018. "Investigation of the Financial Stability of S&P 500 Using Realized Volatility and Stock Returns Distribution," JRFM, MDPI, vol. 11(2), pages 1-10, April.
    7. Juho Kanniainen & Robert Pich'e, 2012. "Stock Price Dynamics and Option Valuations under Volatility Feedback Effect," Papers 1209.4718, arXiv.org.
    8. Valdes, Rodrigo, 2017. "What drives the regional integration of agribusiness stocks? Evidence in worldwide perspective," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258265, Agricultural and Applied Economics Association.
    9. Chen, Long, 2009. "On the reversal of return and dividend growth predictability: A tale of two periods," Journal of Financial Economics, Elsevier, vol. 92(1), pages 128-151, April.
    10. Damir Filipovi'c & Sander Willems, 2018. "A Term Structure Model for Dividends and Interest Rates," Papers 1803.02249, arXiv.org, revised May 2020.
    11. Tsafack, Georges & Becker, Ying & Han, Ki, 2023. "Earnings announcement premium and return volatility: Is it consistent with risk-return trade-off?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    12. Engsted, Tom & Pedersen, Thomas Q., 2010. "The dividend-price ratio does predict dividend growth: International evidence," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 585-605, September.
    13. Holger Kraft & Eduardo S. Schwartz, 2010. "Cash Flow Multipliers and Optimal Investment Decisions," NBER Working Papers 15807, National Bureau of Economic Research, Inc.
    14. Holger Kraft & Eduardo Schwartz, 2015. "Cash Flow Multipliers and Optimal Investment Decisions," European Financial Management, European Financial Management Association, vol. 21(3), pages 399-429, June.
    15. Lawrenz, Jochen & Zorn, Josef, 2017. "Predicting international stock returns with conditional price-to-fundamental ratios," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 159-184.

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    More about this item

    Keywords

    risk-return trade-off; risk premium; stochastic volatility; predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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