The dividend term structure

We estimate a model for the term structure of discounted risk-adjusted dividend growth using prices of dividend futures for the Eurostoxx 50. A two-factor model capturing short-term mean reversion within a year and a medium-term component reverting at business-cycle horizon gives an excellent t of these prices. Hence, investors update the valuation of dividends beyond the business cycle only to a limited degree. The two-factor model, estimated on dividend futures data only, explains a large part of observed daily stock market returns. We also show that the two latent factors are related to various economic andfinancial variables.