Journal Article

Dividend Variability and Stock Market Swings

Martin D. D. Evans

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 65, issue 4, pages 711-740
Published in print October 1998 | ISSN: 0034-6527
Published online October 1998 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00065
Dividend Variability and Stock Market Swings

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This paper examines the extent to which swings in stock prices can be related to variations in the discounted value of expected future dividends when investors face uncertainty about their future behaviour. I develop an econometric model that accounts for the instability of U.S. dividend growth and discount rates during the past 120 years. Estimates of the model reveal that changing forecasts of future dividend growth account for more than 90% of the predictable variations in dividend-prices. The estimates also imply that instability in the dividend and discount rate processes contribute significantly to the predictability of long-horizon stock returns.

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Subjects: Economics

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