TY - JOUR
T1 - Stochastic dividend discount model: covariance of random stock prices
AU - Agosto, Arianna
AU - Mainini, Alessandra
AU - Moretto, Enrico
PY - 2018
Y1 - 2018
N2 - 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.
AB - 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.
KW - Dividend discount model
KW - Financial risk management
KW - Markov chain
KW - Stock valuation
KW - Dividend discount model
KW - Financial risk management
KW - Markov chain
KW - Stock valuation
UR - http://hdl.handle.net/10807/133039
U2 - 10.1007/s12197-018-9455-9
DO - 10.1007/s12197-018-9455-9
M3 - Article
SN - 1055-0925
VL - 43
SP - 552
EP - 568
JO - Journal of Economics and Finance
JF - Journal of Economics and Finance
ER -