Stock Market Duration

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See all articles by Ye Li

Ye Li

University of Washington - Foster School of Business

Chen Wang

University of Notre Dame - Mendoza College of Business

Date Written: August 31, 2023


At the peak of the tech bubble, only 0.57% of market valuation comes from dividends in the next year. Taking the ratio of total market value to the value of one-year dividends, we obtain a duration of 175 years. In contrast, at the height of the global financial crisis, more than 2.2% of market value is from dividends in the next year, implying a duration of 46 years. What drives market duration? We find that market participants have limited information about cash flow beyond one year. Therefore, an increase in market duration is due to a decrease in the discount rate rather than good news about long-term growth. Accordingly, market duration negatively predicts annual market return with out-of-sample R2 of 15%, outperforming other predictors in the literature. While the price-dividend ratio reflects the overall valuation level, market duration captures the slope of the valuation term structure. We show that market duration, as a discount rate proxy, is a critical state variable that augments the price-dividend ratio in spanning the (latent) state space for stock-market dynamics.

Keywords: stock market duration, state space dimension, cash flow expectations, return predictability

JEL Classification: G14

Suggested Citation

Li, Ye and Wang, Chen, Stock Market Duration (August 31, 2023). Available at SSRN:

Ye Li

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://

Chen Wang (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States


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