The Life Cycle of Dividend Futures and the Dividend Risk Premium: A Practitioner’s Perspective

Abstract

Dividend futures contracts, which allow investors to gain direct exposure to the dividend stream of equity indexes, has recently gained relevance for the investment community. In this article, we discuss their lifecycle and show how they are exposed to multiple factors that drive their prices. For example, far from maturity, their prices are driven by earnings growth and inflation expectations. As the expiration dates approach, the visibility on earnings and dividends improves and prices converge toward realized dividends. We empirically show that this convergence starts between one and two years before expiration.

TOPICS: Mutual funds/passive investing/indexing, futures and forward contracts, fundamental equity analysis, performance measurement