The Dividend Term Structure

Jac Kragt, Frank de Jong and Joost Driessen

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 3, 829-867

Abstract: We estimate a model for the term structure of discounted risk-adjusted dividend growth using prices of dividend futures for the Eurostoxx 50. A 2-factor model capturing short-term mean reversion within a year and a medium-term component reverting at the business-cycle horizon gives an excellent fit of these prices. Hence, investors update the valuation of dividends beyond the business cycle only to a limited degree. The 2-factor model, estimated on dividend futures data only, explains a large part of observed daily stock market returns. We also show that the 2 latent factors are related to various economic and financial variables.

Date: 2020
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