Deriving Equity Risk Premium Using Dividend Futures

Martin Casta

Working Papers from Czech National Bank, Research and Statistics Department

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.

Keywords: Asset prices; dividend futures; risk premium (search for similar items in EconPapers)
JEL-codes: G12 G41 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-upt
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