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Deriving Equity Risk Premium Using Dividend Futures

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  • Martin Casta

Abstract

In this paper I present a simple stock price decomposition model using the dividend discount model and dividend futures. The main contribution of this paper is the use of dividend futures which represent the risk-adjusted expectations of future dividends. This allows for the calculation of the implied equity risk premium and the decomposition of stock price movements into individual components. Due to the use of daily market data, this method can take into account the structural changes associated with falling interest rates and the Covid-19 pandemic. I empirically show the risk premium development of the S&P 500 Index and Euro Stoxx 50 Index in the last decade.

Suggested Citation

  • Martin Casta, 2021. "Deriving Equity Risk Premium Using Dividend Futures," Working Papers 2021/1, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2021/1
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asset prices; dividend futures; risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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