Time Variation of the Equity Term Structure
63 Pages Posted: 21 Jun 2017 Last revised: 7 Apr 2021
Date Written: August 20, 2020
I study the term structure of one-period expected returns on dividend claims with different maturity. I find that the slope of the term structure is counter cyclical. 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 hard to reconcile with models with a single risk factor. I introduce a model with two priced factors to solve the puzzle.
Keywords: asset pricing, equity term structure, time varying discount rates
JEL Classification: G10, G12
Suggested Citation: Suggested Citation