Term Structure(s) of the Equity Risk Premium

91 Pages Posted: 19 Mar 2018 Last revised: 9 Jan 2019

Date Written: March 19, 2018


By simultaneously using dividend and variance swap data, we show how the term structure of the equity risk premium varies over time and how its shape is affected by liquidity risk premia. The term structure is always positively sloped, while funding liquidity premia and betas explain the high unconditional returns for all dividend claims. Alphas for short-dated dividend claims are actually negative implying that their returns are too low, whereas alphas for long-dated claims seem to be positive. The term structure slope varies positively with the market risk premium, but it is never negative relative to the first contract -- due to the nearly zero risk premium in the first maturity -- and rarely hump-shaped in some empirical models. We show how the maturity term structure -- the risk premium for dividend strips with different maturities -- is connected to both the horizon term structure -- linked to the variance swap term structure -- and various funding liquidity measures. The risk premium is on average increasing with investment horizon, while the maturity risk premium depends primarily on the short-horizon risk premium, implying that short-horizon investors are the marginal ones. All our results hold in the US, the UK, Europe and Japan.

Keywords: Equity Risk Premium, Term Structure, Dividend Swaps, Variance Swaps, Liquidity

JEL Classification: G10, G12, G13, G23

Suggested Citation

Gomes, Leandro and Ribeiro, Ruy, Term Structure(s) of the Equity Risk Premium (March 19, 2018). Available at SSRN: https://ssrn.com/abstract=3144028 or http://dx.doi.org/10.2139/ssrn.3144028

Leandro Gomes

Yale SOM ( email )

New Haven, CT
United States

Ruy Ribeiro (Contact Author)

Insper ( email )

R Quata 300
Sao Paulo, 04542-030

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics