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Deriving equity risk premium using dividend futures |
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| Affiliation: | 1. School of Business, The Richard Stockton College of New Jersey, 101 Vera King Farris Drive, Galloway, NJ 08205, United States;2. Department of Finance, Providence University, 200, Sec. 7, Taiwan Boulevard, Shalu Dist., Taichung City 43301, Taiwan;3. Monfort College of Business, University of Northern Colorado, Campus box 128, Greeley, CO 80631, United States;1. School of Finance, Renmin University of China, China;2. School of Finance & China Financial Policy Research Center, Renmin University of China, China |
| Abstract: | In this paper I present a simple stock price decomposition model using the dividend discount model and dividend futures. The main contribution of this paper is the use of dividend futures which represent the risk-adjusted expectations of future dividends. This allows for the calculation of the implied equity risk premium and the decomposition of stock price movements into individual components. Due to the use of daily market data, this method can take into account the structural changes associated with falling interest rates and the Covid-19 pandemic. I empirically show the risk premium development of the S&P 500 Index and Euro Stoxx 50 Index in the last decade. |
| Keywords: | Asset prices Dividend futures Risk premium |
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