Dividend Risk Premia

Abstract

This paper studies time variation in expected excess returns of traded claims on dividends, bonds, and stock indices for international markets. We introduce a novel dividend risk factor which complements the well-known bond risk factor of Cochrane and Piazzesi (2005) for the U.S., the U.K., the Eurozone and Japan, and run predictive regressions of one-year annual excess returns on both risk factors. Employing our dividend risk factor and the bond risk factor jointly we are able to fit the variation in local stock index returns well. By aggregating over the factors of the four core regions, we create global dividend and bond risk factors which capture excess returns of most of the developed market MSCI country indices as well as a variety of other assets including high yield bonds and a volatility selling strategy. Our findings highlight the value of the information contained in the dividend and bond forward curves and suggest substantial comovement in international risk premia.