This thesis consists of three chapters exploring predictability of stock returns. In the first chapter, I suggest a new approach to analysis of stock return predictability. Instead of relying on predictive regressions, I employ a state space framework. Acknowledging that expected returns and expected dividends are unobservable, I use the Kalman filter technique to extract them from the observed...

In the absence of investment and dividend payments, the surplus is modeled by a Brownian motion. But now assume that the surplus earns investment income at a constant rate of credit interest. Dividends are paid to the shareholders according to a barrier strategy. It is shown how the expected discounted value of the dividends and the optimal dividend barrier can be calculated; Kummer’s confluent...

The paper analyses the determinants of dividend payments and tests the hypothesis that companies pay dividends at the expense of investing in research and development (R&D). The evidence suggests that four fundamental factors – size, growth, profitability and risk – determine the decision to pay dividends but also to invest in R&D. Consistent with previous evidence, the average R&D intensity of...

T he U.S. government subjects corporate dividends to double taxation: It first taxes corporate income, then taxes the same income again when shareholders receive dividends paid out of corporate income. Until 2003, individuals were taxed on dividend income at the same rates as on other forms of income, resulting in overall taxes on dividends much higher than those in most other countries (PriceW...

We propose a new solution concept to address the problem of sharing a surplus among the agents generating it. The problem is formulated in the preferences-endowments space. The solution is defined recursively, incorporating notions of consistency and fairness and relying on properties satisfied by the Shapley value for Transferable Utility (TU) games. We show a solution exists, and call it an O...

This paper examines the implications of payout horizon for the prices of aggregate cashflows. The interaction of two long-run forces — a long-run risk in consumption and aggregate dividends, and a cointegration relationship between consumption and aggregate dividends — leads to non-monotonic relationships between a payout’s horizon and its cash flow risks, discount rate risks, and risk premia. ...

The paper incorporates liquid reserves, interest and dividends in the compound Poisson surplus model. When an insurer’s surplus is below a certain level, it is kept as liquid reserves. As the surplus attains the level, the excess of the surplus above the level will earn interest at a constant interest rate. If the surplus continues to surpass a higher level, the excess of the surplus above this...

We solve the pricing problem for perpetual American puts and calls on dividend-paying assets. The dependence of a dividend process on the underlying stochastic factor is fairly general: any non-decreasing function is admissible. The stochastic factor follows a Lévy process. This specification allows us to consider assets that pay no dividends at all when the level of the underlying factor (say,...

The VAR approach for testing present value models is applied to a heterogeneousagent asset pricing model, using historical observations of the S&P500 index. Besides rational long-term investors, that value assets according to expected dividends, the model features rational and contrarian speculators. Agents choose their strategy based on evolutionary considerations. Supplementing the standard p...