Dividend innovations and volatility of stock returns

This article focuses on dividend innovations as a determinant of predict ability and volatility of returns in three major stock markets, the U.S., U.K., and Japan. All results are based on vector autoregressive (VAR) and auto regressive conditional heteroscedastic (ARCH) approaches, with monthly sampled data. We find that in all three markets dividend‐price ratios and/or dividend growth rates predict returns. Moreover, there is persistence in the variance of stock returns attributed to the innovations related to the same variables.