Recent research suggests that the power law is one of the most universal laws in nature and it also seems to work quite fine in economics and finance. In this paper we show that the power law explains extremely well the relationship between the value of broad-based market indices and their dividends. We also show that this relationship is consistent with declining relative risk aversion of the representative investor. Hence, the power law has a solid economic foundation.

Lüders, Erik, Inge Lüders-Amann und Michael Schröder (2004), The Power Law and Dividend Yields, ZEW Discussion Paper No. 04-51, Mannheim. Download


Lüders, Erik
Lüders-Amann, Inge
Schröder, Michael


Power law, stock prices, dividends, co-integration