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Asian Review of Financial Research, Vol., No..
pp.1579~1625
pp.1579~1625
Liquidity-Adjusted Price-Dividend Ratios and Expected Returns
Bong-Gyu Jang POSTECH in Korea
Bong Soo Lee Florida State University.
Hyun-Tak Lee POSTECH in Korea
This paper proposes a liquidity-adjusted dividend-ratio model. Motivated by the liquidityadjusted asset pricing theory, we show that (log) stock prices, dividends, and stock liquidity are cointegrated and define their linear combination as liquidity-adjusted price-dividend ratios. By considering the potential effect of stock liquidity, our model improves not only the stationarity of price-dividend ratios but also out-of-sample forecasts of returns. We show that our model helps explain a number of asset pricing puzzles such as the equity volatility puzzle and unusual stock market behavior in the 1990s.
Bong-Gyu Jang
Bong Soo Lee
Hyun-Tak Lee
This paper proposes a liquidity-adjusted dividend-ratio model. Motivated by the liquidityadjusted asset pricing theory, we show that (log) stock prices, dividends, and stock liquidity are cointegrated and define their linear combination as liquidity-adjusted price-dividend ratios. By considering the potential effect of stock liquidity, our model improves not only the stationarity of price-dividend ratios but also out-of-sample forecasts of returns. We show that our model helps explain a number of asset pricing puzzles such as the equity volatility puzzle and unusual stock market behavior in the 1990s.
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