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Dividend Risk Premia

Last Updated on 10 February, 2024 by Rejaul Karim

In the comprehensive study “Dividend Risk Premia” authored by Georg Cejnek and Otto Randl, an incisive exploration into the time-varying nature of expected excess returns of traded claims on dividends, bonds, and stock indices reverberates with profound ramifications.

Capturing the essence of this study, the authors introduce a pioneering dividend risk factor, harmonizing with the acclaimed bond risk factor posited by Cochrane and Piazzesi. Uniting the dividend risk factor and the bond risk factor, the model resonates with compelling fidelity with variations in subsequent one-year excess returns of dividend swaps and stock indices across the United States, the United Kingdom, the Eurozone, and Japan, thus extrapolating the dividends and bond risk factors into a comprehensive global framework.

This confluence engenders a prescient fulcrum, encapsulating the diverse complexities of international risk premia with steadfast resonance, shedding a discerning light on the information embedded in dividend and bond forward curves.

Abstract Of Paper

This paper studies time variation in the expected excess returns of traded claims on dividends, bonds, and stock indices for international markets. We introduce a novel dividend risk factor that complements the well-known bond risk factor of Cochrane and Piazzesi (2005). When the dividend risk factor and the bond risk factor are employed jointly, our model fits well to variations in subsequent one-year excess returns of dividend swaps and stock indices of the U.S., the U.K., the Eurozone and Japan. By aggregating over the factors of these four core regions, we create global dividend and bond risk factors that capture the excess returns of most 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 information contained in dividend and bond forward curves and suggest substantial co-movement in international risk premia.

Original paper – Download PDF

Here you can download the PDF and original paper of Dividend Risk Premia.

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Author

Georg Cejnek
ZZ Vermögensverwaltung GmbH; Engelbert Dockner Stiftung

Otto Randl
Vienna University of Economics and Business

Conclusion

In Summary, the concept of “Dividend Risk Premia” is gaining prominence as a leader, reshaping the way we understand the risks involved in financial investments with thoughtful insight.

Georg Cejnek and Otto Randl’s innovative explanation paints a comprehensive picture of the connection between dividend risk premia and global stock market trends. Their research demonstrates the significant value found in the patterns of dividends and bond forward curves.

The study also explores dividend derivatives, the Cochrane-Piazzesi factor, and the term structure of equity risk premia, shedding light on the essential elements of cash flow risk and discount rate risk.

This influential work reveals the intricate connections between global risk factors, providing profound insights into the complexities of risk dynamics on a global scale. Overall, this remarkable piece of research brings a new level of understanding to the hidden aspects of risk in the world of finance.

Related Reading:

The Term Structure of Returns: Facts and Theory

Anomalies Enhanced: A Portfolio Rebalancing Approach

FAQ

1. What is the main contribution of the study “Dividend Risk Premia” by Cejnek and Randl to the understanding of international risk premia?

The main contribution of the study is the introduction of a novel dividend risk factor that complements the well-known bond risk factor proposed by Cochrane and Piazzesi. By employing both the dividend risk factor and the bond risk factor jointly, the authors create a model that effectively captures the variations in subsequent one-year excess returns of dividend swaps and stock indices for the U.S., the U.K., the Eurozone, and Japan. The study extends this framework to create global dividend and bond risk factors, providing a comprehensive understanding of international risk premia.

2. How do the dividend risk factor and bond risk factor jointly contribute to explaining excess returns across international markets?

The study demonstrates that when the dividend risk factor and the bond risk factor are employed together in a model, it fits well to variations in subsequent one-year excess returns of dividend swaps and stock indices across different regions, including the U.S., the U.K., the Eurozone, and Japan. This joint approach allows for a more comprehensive explanation of excess returns in different markets and highlights the value of incorporating both dividend and bond risk factors.

3. What assets and market indices are captured by the global dividend and bond risk factors created in the study?

The global dividend and bond risk factors capture the excess returns of most developed market MSCI country indices, indicating their broad applicability. Additionally, these factors are shown to influence the excess returns of various assets, including high-yield bonds and a volatility-selling strategy. The study reveals substantial co-movement in international risk premia, providing insights into the interconnectedness of different financial instruments and markets.

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