Dividend sensitivity to economic factors, stock valuation, and long-run risk

•We derive a stock valuation model with long-run risk.•The model integrates the multiple dimensions of long-run risk.•Dividend growth is linearly related to Nsensitivity coefficients.•Price equilibrium is determined by dividends and N risk parameters.

In this paper, we develop a theoretical stock valuation model that takes into account the long-run sensitivity of dividends to various economic factors. Our valuation process integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in the literature). More precisely, we demonstrate that a stock's long-run dividend growth is negatively related to its current dividend-price ratio and linearly related to N sensitivity coefficients, given by the long-run sensitivity between dividends and economic factors. Then, we show that the equilibrium price of a stock is a function of its current dividend, long-run dividend growth, and N risk parameters.