Time Variation of the Equity Term Structure

63 Pages Posted: 21 Jun 2017 Last revised: 7 Apr 2021

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Date Written: August 20, 2020

Abstract


I study the term structure of one-period expected returns on dividend claims with different maturity. I find that the slope of the term structure is counter cyclical. The counter cyclical variation is consistent with theories of long-run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. More generally, the average and cyclicality of the slope are hard to reconcile with models with a single risk factor. I introduce a model with two priced factors to solve the puzzle.

Keywords: asset pricing, equity term structure, time varying discount rates

JEL Classification: G10, G12

Suggested Citation

Gormsen, Niels Joachim, Time Variation of the Equity Term Structure (August 20, 2020). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2989695 or http://dx.doi.org/10.2139/ssrn.2989695

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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