Time Variation of the Equity Term Structure
60 Pages Posted: 21 Jun 2017 Last revised: 24 Aug 2020
Date Written: August 20, 2020
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: Suggested Citation