On the Timing and Pricing of Dividends

We use data from options and futures markets to recover the prices of dividend strips on the aggregate stock market. The price of a k-year dividend strip is the present value of the dividend paid in k years. The value of the stock market is the sum of all dividend strip prices across maturities. We study the asset pricing properties of strips and find that expected returns, Sharpe ratios, and volatilities on short-term dividend strips are higher than on the aggregate stock market, while their CAPM betas are well below one. Prices of short-term dividend strips are more volatile than their realizations, leading to excess volatility and return predictability. The properties of dividend strip prices implied by leading asset pricing models differ from those observed in the data. First draft: June 2009. We are grateful to Ravi Bansal, Robert Battalio, Alessandro Beber, John Campbell, John Cochrane, George Constantinides, Zhi Da, Peter DeMarzo, Joost Driessen, Darrell Duffie, Pengjie Gao, John Heaton, Xavier Gabaix, Nicolae Garleanu, Lars Hansen, Otto van Hemert, Mark Hendricks, Dirk Jenter, Martin Lettau, Lars Lochstoer, Hanno Lustig, Pascal Maenhout, Toby Moskowitz, Christian Mueller-Glissmann, Stefan Nagel, Stavros Panageas, Lubos Pastor, Lasse Pedersen, Anamaria Pieschacon, Rob Stambaugh, Sheridan Titman, Stijn Van Nieuwerburgh, Adrien Verdelhan, Pietro Veronesi, Rob Vishny, Evert Vrugt, Jessica Wachter, Jeff Wurgler, Amir Yaron, Motohiro Yogo and seminar participants APG Investments, AQR Capital, Berkeley Haas, Boston College, Brigham Young University, CEPR Gerzensee meetings, Chicago Booth, NBER Asset Pricing Meetings, Notre Dame, Stanford GSB, Tilburg University, UT Austin, and the Empirical Asset Pricing Retreat at the University of Amsterdam for useful comments and discussions. We thank CRSP for generous financial support. [email protected], (650)-721-1353 [email protected], (919)-660-1948 [email protected], (773)-834-4199.