Short-Duration Equity Return Puzzle

26 Pages Posted: 11 Oct 2023 Last revised: 13 Oct 2023

See all articles by Wentao Li

Wentao Li

Saïd Business School, University of Oxford

Date Written: March 10, 2023


Short-duration dividend strips have high conditional Sharpe ratios during crises, far beyond the theoretical upper bound. The finding is called the short-duration equity return puzzle. Using dividend prices and analyst dividend forecasts, this paper constructs the forward-looking required rate of return and the conditional Sharpe ratio for S&P 500 dividend strips over the period between 2002 and 2021. This paper also verifies that analyst dividend forecasts are reasonably accurate. During the Covid-19 pandemic crisis, the required rate of return of the 1-year dividend peaked at 55%, and its conditional Sharpe ratio rose to above 14. This paper simulates the Hansen-Jagannathan theoretical upper bounds of the conditional Sharpe ratio for four mainstream macro-finance models—the preferred habit model (Campbell and Cochrane 1999), the long-run risk model (Bansal and Yaron 2004), the rare disaster model (Gabaix 2012), and the term structure model (Lettau and Wachter 2011). These predicted upper bounds are 2 to 17 times lower than the observed maximum. The required rates of return of 2- to 4-year dividends reached 32%, 19%, and 15% in March 2020. Their Sharpe ratios peaked at 12, 8, and 8, which were also too high to explain. The finding is robust to measurement errors and transaction costs.

Keywords: Dividend Strip; Conditional Sharpe Ratio; Stochastic Discount Factor

JEL Classification: G12, G17, G01

Suggested Citation

Li, Wentao, Short-Duration Equity Return Puzzle (March 10, 2023). Available at SSRN: or

Wentao Li (Contact Author)

Saïd Business School, University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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