Stock-Market Equilibrium and the Dividend Yield

IMF Working Papers, August 1, 1996

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Stock-Market Equilibrium and the Dividend Yield

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Bibliographic details

• Authors: Charles Frederick Kramer
• Published: August 1, 1996
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451951981.001

Research question and scope

• Can fundamentals account for the recent performance of the U.S. stock market?
• Focuses on deviations of the price/earnings ratio from historical averages and a historic low in the dividend/price ratio.
• Assesses the recent rise in the stock market using a model for the equilibrium dividend/price ratio.

Main findings

• Economic variables can account for most of the recent fall in the dividend/price ratio.
• Mutual-fund inflows have some marginal explanatory power for the recent rise in stock prices.
• Implication: while fundamentals explain a large share of movements in the dividend/price ratio, flows into mutual funds contributed additionally, though marginally.

Model components and key concepts examined

• Equilibrium dividend/price ratio (central model variable).
• Consideration of:
  • dividend growth
  • inflation rate
  • default premium
  • log dividend yield
  • mutual-fund inflow
  • price ratio
  • steepening yield curve
  • Treasury bills and bonds (implied through yield curve and related terms)

Subjects and keywords

• Subject: Asset prices, Financial institutions, Financial markets, Financial services, Prices, Stock markets, Stocks, Treasury bills and bonds, Yield curve
• Keywords: Asset prices, default premium, dividend growth, inflation rate, log dividend yield, mutual-fund inflow, price ratio, steepening yield curve, Stock markets, Stocks, Treasury bills and bonds, WP, Yield curve

IMF Working Papers — "Stock-Market Equilibrium and the Dividend Yield" by Charles Frederick Kramer, Working Paper No. 1996/090.