The Term Structure of Equity Risk Premia

75 Pages Posted: 1 Dec 2019

See all articles by Ravi Bansal

Ravi Bansal

Duke University

Amir Yaron

Bank of Israel; University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Shane Miller

University of Michigan - Ross School of Business

Dongho Song

Johns Hopkins University - Carey Business School

Date Written: December 1, 2019

Abstract

We show that the term structure of dividend risk premia and discount rates implied by equity strip yields are downward sloping in recessions and upward sloping in expansions, a finding which is statistically significant and robust across the U.S., Europe, and Japan. Our results are based on the estimation of a regimeswitching dividend growth model, which allows us to characterize not just the conditional but also unconditional moments. Our evidence suggests that the claim about downward sloping equity term structure is rejected from the data. This is an important finding as the standard asset pricing models are not in conflict with the new data on dividend strips. In fact, we show that the standard asset pricing models extended with regime-switching dynamics are able to reconcile these facts.

Keywords: Asset pricing, business cycle phases, dividend strips, equity term structure, regime switching

JEL Classification: D51, E21, G12, G13

Suggested Citation

Bansal, Ravi and Yaron, Amir and Yaron, Amir and Miller, Shane and Song, Dongho, The Term Structure of Equity Risk Premia (December 1, 2019). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3689947 or http://dx.doi.org/10.2139/ssrn.3689947

Ravi Bansal

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Amir Yaron (Contact Author)

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shane Miller

University of Michigan - Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Dongho Song

Johns Hopkins University - Carey Business School ( email )

Baltimore, MD 20036-1984
United States

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