Time Variation of the Equity Term Structure

60 Pages Posted: 21 Jun 2017 Last revised: 24 Aug 2020

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Date Written: August 20, 2020

Abstract

I document that the term structure of one-period expected returns on dividend-claims is counter-cyclical: it is downward sloping in good times, but upward sloping in bad times. The counter-cyclical variation is consistent with theories of long-run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. More generally, the average and cyclicality of the slope are together inconsistent with any model with a single price of risk. I introduce a new model with two priced risk factors to solve the puzzle.

Keywords: asset pricing, equity term structure, time varying discount rates

JEL Classification: G10, G12

Suggested Citation

Gormsen, Niels Joachim, Time Variation of the Equity Term Structure (August 20, 2020). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2989695 or http://dx.doi.org/10.2139/ssrn.2989695

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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