Dividend sensitivity to economic factors, stock valuation, and long-run risk

Abstract

Available online xxxx JEL classification: D91 G12 Keywords: Multifactor model Intertemporal model Stock valuation CCAPM Long-run risk a b s t r a c tIn this paper, we develop a theoretical stock valuation model that takes into account the long-run sensitivity of dividends to various economic factors. Our valuation process integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in the literature). More precisely, we demonstrate that a stock's long-run dividend growth is negatively related to its current dividend-price ratio and linearly related to N sensitivity coefficients, given by the long-run sensitivity between dividends and economic factors. Then, we show that the equilibrium price of a stock is a function of its current dividend, long-run dividend growth, and N risk parameters.

Dividend multifactor process, long-run risk and payout ratios

“…Author's Final Version Bansal and Shaliastovich (2013) propose that inflation influences asset returns because inflation is exposed to the same real shocks that drive consumption and longrun risk. Furthermore, Bergeron (2013) develops a theoretical stock valuation model that considers the long-run sensitivity of dividends to various economic factors. In particular, the model reveals that a stock's long-run dividend growth is negatively related to its current dividend-price ratio and is linearly related to N sensitivity coefficients, given by the long-run covariance between dividends and economic factors.…”

“…9 From equation(55), it is easy to see that if the market dividend growth is the only factor and if the sensitive coefficient has an unit measure of sensitivity, then the target payout ratio is identical to the aggregate payout ratio.10 If x, y and e represent general variables, and if y = a + bx + e, where COV(x, e) = 0, then COV(x, y) = COV(x, a + bx + e) = COV(x, x)b. Therefore: b = COV(x, y)/σ 2 (x).11 Recall that for the canonical CCAPM, aggregate dividend corresponds to aggregate consumption.12 Concerning the concept of long-run risk, see, again,Bansal and Yaron (2004),Bansal et al (2005),Hansen et al (2008),Bansal et al (2009),Bansal and Kiku (2011),Bansal and Shaliastovich (2013), orBergeron (2013).…”