Dividend Risk Premia

This paper studies time variation in expected excess returns of traded claims on dividends, bonds, and stock indices for US and international markets. We construct dividend risk factors corresponding to the well-known bond risk factors of Cochrane and Piazzesi (2005) and run predictive regressions of one-year annual excess returns on both risk factors. We find both return forecasting factors to be important for the prediction of returns on stock indices and traded dividends, but only the bond risk factor is highly relevant for bond returns. Further analyzing the components of risk, we find global factors to explain the largest part of the variation in index excess returns, while local factors still improve the fit for bond and dividend markets. The return-forecasting factors also predict excess returns for regions and assets that we did not use to construct the risk factors (equity indices in developed and emerging markets, emerging market bonds, corporate bond indices and a volatility selling strategy), suggesting substantial comovement in international risk premia.