Implied Dividend Volatility and Expected Growth

15 Pages Posted: 23 Dec 2020 Last revised: 31 Dec 2020

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Ian Martin

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: December 30, 2020

Abstract

A large literature is concerned with measuring economic uncertainty and quantifying its impact on real decisions, such as investment, hiring, and R&D, and ultimately economic growth. The COVID-19 pandemic underscores the importance of timely measures of uncertainty and expected growth across horizons. Asset prices, such as dividend futures and index options, provide particularly useful measures as they are forward looking and available at high frequencies.

We extend this literature by using new data on the prices of options on index-level dividends, from which we can compute implied dividend volatility. These implied volatilities differ from the VIX which measures uncertainty about stock prices, not only uncertainty about dividends. We construct a term structure of implied dividend volatilities that characterizes how uncertainty varies across horizons. We study how this term structure developed over the COVID-19 crisis, documenting a substantial increase in the volatility of near-future dividends that lingers even as the volatility of the overall market portfolio has started to fall.

In addition to introducing this market, we also provide new theoretical results that show how these data can be used to derive lower bounds on expected dividend returns and on expected growth rates, by maturity. This provides an alternative to methods used in the literature using vector autoregressions or survey expectations, and sharpens alternative bounds in the literature.

Suggested Citation

Gormsen, Niels Joachim and Koijen, Ralph S. J. and Martin, Ian W. R., Implied Dividend Volatility and Expected Growth (December 30, 2020). Available at SSRN: https://ssrn.com/abstract=3753691 or http://dx.doi.org/10.2139/ssrn.3753691

Niels Joachim Gormsen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ian W. R. Martin

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/martiniw/

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