Download This PaperDisaster Recovery and the Term Structure of Dividend Strips
60 Pages Posted: 2 Jun 2020
Date Written: May 1, 2020
Abstract
Recent empirical findings document downward-sloping term structures of equity return volatility and risk premia. An equilibrium model with rare disasters followed by recoveries helps reconcile theory with empirical observations. Indeed, recoveries outweigh the upward-sloping effect of time-varying disaster intensity and expected growth, generating downward-sloping term structures of dividend growth risk, equity return volatility, and equity risk premia. In addition, the term structure of interest rates is upward-sloping when accounting for recoveries and downward-sloping otherwise. The model quantitatively reconciles high risk premia and a low risk-free rate with the shape of the term structures, which are at odds in other models.
Keywords: Recovery, Rare disasters, Term structures of equity, Dividend strips, Asset pricing puzzles
JEL Classification: D53, D51, E21, G12, G13
Suggested Citation: Suggested Citation