Expected Returns and Dividend Growth Rates Implied in Derivative Markets
Speaker
Abstract
| I show that the dividend growth implied in S&P 500 options and futures predicts changes in dividends and thereby improves the forecasts of market returns. Guided by a simple present value model, I use the implied dividend growth to correct the standard dividend-price ratio (DP) for variation in expected dividend growth. I find that the corrected DP predicts S&P 500 returns in the period 1994.2009 significantly better than does the uncorrected DP. This predictive improvement is especially pronounced over the monthly horizon, holds both in-sample and out-of-sample, yields a sizable gain in the Sharpe ratio, and is robust to small sample bias. The results indicate that expected returns and expected dividend growth are highly correlated. |
| Contact information: |
| Myra Lissenberg |
