Production-Based Term Structure of Equity Returns

Abstract

We study the link between timing of cash flows and expected returns in general equilibrium production economies. Our model incorporates (i) heterogenous exposure to aggregate pro- ductivity shocks across capital vintages, and (ii) an endogenous stock of growth options. Our economy features a V-shaped term structure of aggregate dividends in which dividend yields decrease with maturity up to ten years, consistent with the empirical findings of Binsbergen et al. (2012a). Our model also reproduces the empirical negative relationship between cash-flow duration and expected returns in the cross section of book-to-market sorted stocks.

Keywords: Term Structure, Duration, Value Premium