Duration-Driven Returns

Abstract

We propose a duration-based explanation for the major equity risk factors, including value, profitability, investment, low-risk, and payout factors. Both in the US and globally, these factors invest in firms that earn most of their cash flows in the near future. The factors could therefore be driven by a premium on near-future cash flows. We test this hypothesis using a new dataset of single-stock dividend futures, which are claims on annual dividends for individual firms. Consistent with our hypothesis, expected CAPM alpha on individual dividends decrease in maturity within a firm, but do not vary across firms once controlling for maturity.

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

JEL Classification: G10, G12, G40