Dynamic Equity Slope

60 Pages Posted: 19 Aug 2020 Last revised: 30 Oct 2020

See all articles by Matthijs Breugem

Matthijs Breugem

University of Turin - Collegio Carlo Alberto

Stefano Colonnello

Ca Foscari University of Venice; Halle Institute for Economic Research

Roberto Marfè

University of Turin - Collegio Carlo Alberto

Francesca Zucchi

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2020

Abstract

We develop a general equilibrium model that jointly explains important features of the term structure of equity: (i) a negative unconditional term premium, (ii) countercyclical term premia, (iii) procyclical equity yields, (iv) premia to value and growth claims respectively increasing and decreasing with the horizon. The economic mechanism hinges on the interaction between heteroskedastic long-run growth, which steers countercyclical risk premia, and homoskedastic short-term shocks in the presence of limited market participation, which generate sizeable short-term risk premia. The slope dynamics hold irrespective of the sign of its unconditional average. We provide empirical support to our model assumptions and predictions.

Keywords: term structure of equity, price dynamics, general equilibrium, expected growth volatility

JEL Classification: D51, D53, E30, G10, G12

Suggested Citation

Breugem, Matthijs and Colonnello, Stefano and Marfè, Roberto and Zucchi, Francesca, Dynamic Equity Slope (July 31, 2020). Available at SSRN: https://ssrn.com/abstract=3657285 or http://dx.doi.org/10.2139/ssrn.3657285

Matthijs Breugem

University of Turin - Collegio Carlo Alberto ( email )

Piazza Albarello 8
Torino, Torino 10122
Italy

Stefano Colonnello

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Roberto Marfè (Contact Author)

University of Turin - Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10122
Italy

Francesca Zucchi

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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