The Short Duration Premium

Abstract

Stocks of firms with cash flows concentrated in the short-term (i.e., short duration stocks) pay a large premium over long duration stocks. I empirically demonstrate this premium: (i) is long-lived and strong even among large firms; (ii) subsumes the value and profitability premia; and (iii) exposes investors to variation in expected returns, especially in times when the premium is high. These facts are consistent with an intertemporal model in which the marginal (long-term) investor dislikes expected return declines as they lead to lower expected wealth growth. The model also captures the positive relation between risk premia and bond duration.

Keywords: Equity Duration, Term Structure of Risk Premia, Intertemporal CAPM, Reinvestment Risk, Value Premium, Profitability Premium

JEL Classification: E32, E43, E44, G10, G11, G12