Time Variation of the Equity Term Structure

65 Pages Posted: 21 Jun 2017 Last revised: 3 Oct 2019

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Date Written: October 1, 2018


I document that the term structure of holding-period equity returns 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, any one-factor model will fail to explain both the average downward slope and the counter-cyclical variation. I therefore 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 (October 1, 2018). 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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