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L. Piccotti: Time Varying Dividend Risk Premia

February 6, 2025

The dividend risk premium (DRP) is examined at the portfolio and firm levels. At the portfolio level, the DRP is procyclical and trend-stationary with a half-life of 3.72 months. The Global Financial Crisis represents a structural break in dividend strip pricing and in DRP half-lives. Following the GFC, strip return alpha becomes significantly positive and DRP half-lives become significantly longer. At the firm level, stocks robustly display mean-reversion in DRPs. Investor sentiment and interest rates significantly explain DRP levels and magnitudes. The relationship between DRPs and real rates suggests that the DRP-implied neutral rate for the economy (r-star) is 1.471%.

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