Holding Period Effects in Dividend Strip Returns

Abstract

We estimate short-duration dividend strip prices from 25 years-worth of S&P 500 index option data (1996-2020). We show that short-duration strips offer substantially more attractive returns than does the market, but the measurement error obscures this result at monthly holding periods. For holding periods longer than one year, where the effect of the measurement error dissipates, the strip Sharpe ratio is two to four times the market Sharpe ratio. This outperformance holds in different subperiods, as well as conditionally on recessions or expansions. We also document that the return on the strip in excess of the market is highly predictable.

Keywords: Dividend term structure, dividend strips, option pricing, interest rate invariant

JEL Classification: G12, G13, G35