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Duration-Based Stock Valuation

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  • van Binsbergen, Jules

Abstract

Interest rates across maturities have dropped to all-time low levels around the world. These unexpected shocks to discount rates have an important effect on the valuation of long duration assets. To quantify this effect, I construct a number of counterfactual fixed income portfolios that match the duration of the dividend strips of the aggregate stock market. I show that such fixed income portfolios have performed as well, if not better, than the U.S. stock market in the past five decades, while exhibiting similar (or higher) levels of volatility. Therefore, investors have received little to no compensation for taking long duration nominal dividend risk in the past half century. Further, if anything, stocks seem to have too little volatility (not excess volatility) compared to these fixed income counterfactuals. I discuss several explanations for these findings, including a secular decline in economic growth rates, dividends' potential to hedge against inflation, as well as the diversification of dividend risk across maturities. These results also have important implications for research on the cross-section of stock returns and capital structure.

Suggested Citation

  • van Binsbergen, Jules, 2020. "Duration-Based Stock Valuation," CEPR Discussion Papers 14904, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14904
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    References listed on IDEAS

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    Cited by:

    1. van Binsbergen, Jules H. & Diamond, William F. & Grotteria, Marco, 2022. "Risk-free interest rates," Journal of Financial Economics, Elsevier, vol. 143(1), pages 1-29.
    2. Ricardo J. Caballero & Alp Simsek, 2020. "Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect," NBER Working Papers 27712, National Bureau of Economic Research, Inc.
    3. Andrei, Daniel & Carlin, Bruce I., 2023. "Schumpeterian competition in a Lucas economy," Journal of Economic Theory, Elsevier, vol. 208(C).
    4. Thomas Kroen & Ernest Liu & Atif Mian & Amir Sufi, 2021. "Falling Rates and Rising Superstars," Working Papers 2021-3, Princeton University. Economics Department..
    5. Benjamin Knox & Annette Vissing-Jorgensen, 2022. "A Stock Return Decomposition Using Observables," Finance and Economics Discussion Series 2022-014, Board of Governors of the Federal Reserve System (U.S.).
    6. Niels Joachim Gormsen & Eben Lazarus, 2023. "Duration‐Driven Returns," Journal of Finance, American Finance Association, vol. 78(3), pages 1393-1447, June.

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    Keywords

    Stock market performance; Covid-19; Growth;
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