Equity Yields

Abstract

We study a new data set of dividend derivatives with maturities up to 10 years across three world regions: the US, Europe, and Japan. We use these asset prices to construct equity yields, analogous to bond yields. We decompose the equity yields to obtain a term structure of expected dividend growth rates and a term structure of risk premia, which decomposes the equity risk premium by maturity. We find that the slope of the term structure of risk premia is pro-cyclical, whereas the slope of the term structure of expected dividend growth rates is counter-cyclical. The comovement of yields across regions is on average higher for long-maturity yields than for short-maturity yields, whereas the variation in this comovement is much higher for short-maturity yields.

Keywords: Growth expectations, Equity risk premium, Term structure of equity