Duration-Driven Returns

44 Pages Posted: 14 Jun 2019

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Eben Lazarus

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 22, 2019

Abstract

We propose a duration-based explanation for the return to major equity risk factors, including value, profitability, investment, low risk, and payout factors. Both in the US and globally, firms with high expected returns predicted by these factors also have a short cash-flow duration, meaning that these firms are expected to earn most of their cash flows in the near future. The returns to the factors can thus be explained by a simple model where near-future cash flows have high risk- adjusted returns, which is consistent with the evidence on the equity term structure. We find evidence for such a model using a novel dataset of single-stock dividend futures that allow us to study fixed-maturity equity claims for a cross-section of firms.

Keywords: asset pricing, cross-section of stock returns, cash-flow growth, duration, survey expectations, dividend strips

JEL Classification: G10, G12, G40

Suggested Citation

Gormsen, Niels Joachim and Lazarus, Eben, Duration-Driven Returns (April 22, 2019). Available at SSRN: https://ssrn.com/abstract=3359027 or http://dx.doi.org/10.2139/ssrn.3359027

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Eben Lazarus

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street, E62-633
Cambridge, MA 02142
United States
6173247036 (Phone)

HOME PAGE: http://https://www.mit.edu/~elazarus

Register to save articles to
your library

Register

Paper statistics

Downloads
288
Abstract Views
1,172
rank
105,689
PlumX Metrics