Intermediary-Based Equity Term Structure

66 Pages Posted: 7 Oct 2019 Last revised: 9 Nov 2021

See all articles by Kai Li

Kai Li

Peking University HSBC Business School

Chenjie Xu

Shanghai University of Finance and Economics - Department of Finance

Date Written: October 5, 2019

Abstract

We decompose the term structure of equity yields into an equity term premium and a mean reversion component about the expected changes in future yields to understand a seemingly contradictory evidence, that is, equity term premium is counter-cyclical, while the term structure slope of equity yields is pro-cyclical and even switches signs. Although the first component is counter-cyclical, we show the second component dominantly drives the pro-cyclical fluctuations of the overall equity yield curve. We propose a quantitative financial intermediary-based asset pricing model, in which the time-varying tightness of intermediaries' leverage constraint drives the mean reversion component.

Keywords: equity term structure, financial intermediary, mean reversion, discount rate

JEL Classification: E2, E3, G12

Suggested Citation

Li, Kai and Xu, Chenjie, Intermediary-Based Equity Term Structure (October 5, 2019). Available at SSRN: https://ssrn.com/abstract=3464722 or http://dx.doi.org/10.2139/ssrn.3464722

Kai Li (Contact Author)

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

Chenjie Xu

Shanghai University of Finance and Economics - Department of Finance ( email )

Shanghai, 200433
China

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