The price of common stocks, defined as the sum of all future discounted dividends, is at the heart of both the dividend discount models (DDM) and the stochastic DDM (SDDM). Gordon and Shapiro (Manag Sci 3:102–110 1956) assume a deterministic and constant dividends’ growth rate, whereas Hurley and Johnson (Financ Anal J 4:50–54 1994, J Portf Manag 25(1)27–31 1998) and Yao (J Portf Manag 23(4)99–103 1997) introduce randomness by letting the growth rate be a finite-state random variable and random dividends behave in a Markovian fashion. In this second case expected stock price is determined, but what if higher-order moments are needed? In order to address a number of financial topics, the present contribution presents an explicit formula for the covariance between (possibly) correlated stock prices.

Agosto, A., Mainini, A., Moretto, E. (2019). Stochastic dividend discount model: covariance of random stock prices. JOURNAL OF ECONOMICS AND FINANCE, 43(3), 552-568 [10.1007/s12197-018-9455-9].

Stochastic dividend discount model: covariance of random stock prices

Mainini, A;Moretto, E
2019

Abstract

The price of common stocks, defined as the sum of all future discounted dividends, is at the heart of both the dividend discount models (DDM) and the stochastic DDM (SDDM). Gordon and Shapiro (Manag Sci 3:102–110 1956) assume a deterministic and constant dividends’ growth rate, whereas Hurley and Johnson (Financ Anal J 4:50–54 1994, J Portf Manag 25(1)27–31 1998) and Yao (J Portf Manag 23(4)99–103 1997) introduce randomness by letting the growth rate be a finite-state random variable and random dividends behave in a Markovian fashion. In this second case expected stock price is determined, but what if higher-order moments are needed? In order to address a number of financial topics, the present contribution presents an explicit formula for the covariance between (possibly) correlated stock prices.
Articolo in rivista - Articolo scientifico
Scientifica
Dividend discount model; Financial risk management; Markov chain; Stock valuation;
English
Agosto, A., Mainini, A., Moretto, E. (2019). Stochastic dividend discount model: covariance of random stock prices. JOURNAL OF ECONOMICS AND FINANCE, 43(3), 552-568 [10.1007/s12197-018-9455-9].
Agosto, A; Mainini, A; Moretto, E
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10281/382335
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