Abstract
We construct a model-free term structure of dividend risk premiums from option prices and aggregate analyst forecasts. Applying the method to 2004-2017 U.S. data, we find it is hump-shaped. Its level increases in business cycle contractions and decreases during expansions. The on average negative dividend term premium steepens in contractions and flattens in expansions, driven by strong variations in short-horizon dividend premiums. Buying the next year of S&P 500 dividends whenever the one-year dividend risk premium is positive has earned twice the Sharpe ratio of the index.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
