Dividend Volatility and Asset Pricing: A Narrow-Framing Approach

摘要

This paper proposes a theoretical model to study the role of aggregate dividend volatility in asset prices. In our model, narrow-framing investors are loss averse over uctuations in the value of their nancial wealth. Persistent dividend volatility in- dicates persistent uctuation in their nancial wealth and makes stocks undesirable. Our model can explain the high mean, excess volatility, and predictability of stock returns while maintaining a low and stable risk-free rate. Consistent with the data, stock returns have a low correlation with consumption growth, and Sharpe ratios are time-varying. Moreover, based on the empirical evidence that dividend volatility has declined dramatically over the past fty years, our model provides an alternative ex- planation for the decline in equity premiums.