Equity Term Structures without Dividend Strips Data

44 Pages Posted: 12 Mar 2020

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Serhiy Kozak

University of Maryland - Robert H. Smith School of Business

Date Written: February 6, 2020

Abstract

We use a large cross-section of equity returns to estimate a rich affine model of equity prices, dividends, returns and their dynamics. Using the model, we price dividend strips of the aggregate market index, as well as any other well-diversified equity portfolio. We do not use any dividend strips data in the estimation of the model; however, model-implied equity yields generated by the model match closely the equity yields from the traded dividend forwards reported in the literature. Our model can therefore be used to extend the data on the term structure of discount rates in three dimensions: (i) over time, back to the 1970s; (ii) across maturities, since we are not limited by the maturities of actually traded dividend claims; and most importantly, (iii) across portfolios, since we generate a term structure for any portfolio of stocks (e.g., small or value stocks). The new term structure data generated by our model (e.g., separate term structures for value, growth, investment and other portfolios, observed over a span of 45 years that covers several recessions) represent new empirical moments that can be used to guide and evaluate asset pricing models.

Keywords: equity strips, risk premia, dividend claims, term structure

JEL Classification: G11, G12

Suggested Citation

Giglio, Stefano and Kelly, Bryan T. and Kozak, Serhiy, Equity Term Structures without Dividend Strips Data (February 6, 2020). Available at SSRN: https://ssrn.com/abstract=3533486 or http://dx.doi.org/10.2139/ssrn.3533486

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bryan T. Kelly

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Serhiy Kozak (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

7621 Mowatt Ln
College Park, MD 20742
United States

HOME PAGE: http://https://serhiykozak.com

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