Dynamic Equity Slope
University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 21/WP/2020
Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC
85 Pages Posted: 12 Jan 2021 Last revised: 17 Apr 2023
There are 2 versions of this paper
Dynamic Equity Slope
Date Written: June 30, 2020
Abstract
This paper empirically documents that expected growth volatility is a key driver of the equity term structure dynamics. A general equilibrium model jointly explains four important patterns: (i) a potentially negative unconditional equity term premium, (ii) countercyclical equity term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and flat with the horizon. The economic mechanism hinges on the interaction between heteroscedastic long-run growth, which leads to countercyclical risk premia, and homoscedastic short-term shocks under limited market participation, which produce sizable risk premia to short-term cash flows. The equity slope dynamics hold irrespective of the sign of its unconditional average.
Keywords: Term Structure of Equity, Dynamics, General Equilibrium, Expected Growth Volatility
JEL Classification: D51, D53, E30, G10, G12
Suggested Citation: Suggested Citation