Risk aversion, dividend growth and the foreign exchange forward premium

Abstract

This paper investigates the empirical performance of dividend growth as a stochastic discount factor in an international consumption based capital asset pricing model. Given that dividend growth exhibits greater variability than consumption growth, it has potential to provide a better discount factor. We find that even although our proposed model yields lower estimates of the risk aversion parameter than the consumption growth model, the estimates are greater 10. Neither model is rejected by the data.