Risk and Return of Short-Duration Equity Investments
48 Pages Posted: 3 Jan 2014 Last revised: 14 Mar 2017
Date Written: December 22, 2015
We analyze short-duration equity investments using traded claims on index dividends. We show that investment strategies with constant short maturity outperform a systematic long position in the underlying equity index on a risk-adjusted basis and in absolute terms. Furthermore, we find higher international diversification benefits for this strategy, compared to traditional equity indices. We relate the observed outperformance to market downside exposure, in particular an options-based downside risk factor. We use three alternative models to extract ex-ante risk premia implied in the prices of dividend derivatives and find evidence for substantial time variation in expected returns.
Keywords: Dividend derivatives; short-maturity anomaly; term structure of equity risk premia; downside risk; investment strategy
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation