Equity Duration and Predictability

56 Pages Posted: 20 Feb 2020 Last revised: 26 Jun 2023

See all articles by Benjamin Golez

Benjamin Golez

University of Notre Dame

Peter Koudijs

Erasmus University Rotterdam

Date Written: January 14, 2020


One of the most puzzling findings in asset pricing is that expected returns dominate the variation in equity price movements, leaving little room for expected dividends to have an impact. Even more puzzling is that this dominance only emerged after 1945. We argue that an increase in equity duration can explain these findings. We provide empirical support across three datasets: dividend strips, the long time series for the market, and the cross-section of stocks. We develop and calibrate a simple present value model that incorporates the effect of duration. Around 50% of the duration effect comes from expected returns being more persistent than dividend growth rates; 46% comes from the variance of shocks to expected returns increasing with duration, and the remaining 4% is due to the interaction between both effects.

Keywords: Duration, return predictability, dividend growth predictability, historical data, dividend strips

JEL Classification: G12, G17, N2

Suggested Citation

Golez, Benjamin and Koudijs, Peter, Equity Duration and Predictability (January 14, 2020). Available at SSRN: https://ssrn.com/abstract=3519246 or http://dx.doi.org/10.2139/ssrn.3519246

Benjamin Golez (Contact Author)

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Peter Koudijs

Erasmus University Rotterdam ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA

HOME PAGE: http://sites.google.com/view/peter-koudijs/home?authuser=0

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