Discount rates and cash flows: A local projection approach

Matthijs Lof*, Henri Nyberg

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

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Abstract

We develop flexible local projections to quantify the relative contributions of expected discount rates and cash flows to the variation of dividend yields. Local projections enable the incorporation of large information sets, the use of monthly data along with annual data, and the consideration of time variation in the dividend yield decomposition. By expanding the set of state variables and allowing for time-varying parameters, our results show that the variation of expected discount rates remains the primary contributor to market volatility, whereas the contribution of expected cash flows is considerably smaller.

Original languageEnglish
Article number107127
Number of pages18
JournalJOURNAL OF BANKING AND FINANCE
Volume162
DOIs
Publication statusE-pub ahead of print - 7 Mar 2024
MoE publication typeA1 Journal article-refereed

Keywords

  • Decomposition
  • Dividend growth
  • Dividend yield
  • Local projections

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