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Duration‐Driven Returns

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  • NIELS JOACHIM GORMSEN
  • EBEN LAZARUS

Abstract

We propose a duration‐based explanation for the premia on major equity factors, including value, profitability, investment, low‐risk, and payout factors. These factors invest in firms that earn most of their cash flows in the near future and could therefore be driven by a premium on near‐future cash flows. We test this hypothesis using a novel data set of single‐stock dividend futures, which are claims on dividends of individual firms. Consistent with our hypothesis, the expected Capital Asset Pricing Model alpha on individual cash flows decreases in maturity within a firm, and the alpha is not related to the above characteristics when controlling for maturity.

Suggested Citation

  • Niels Joachim Gormsen & Eben Lazarus, 2023. "Duration‐Driven Returns," Journal of Finance, American Finance Association, vol. 78(3), pages 1393-1447, June.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:3:p:1393-1447
    DOI: 10.1111/jofi.13216
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    References listed on IDEAS

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    Cited by:

    1. John H Cochrane, 2022. "Portfolios for Long-Term Investors [Rare disasters and asset markets in the twentieth century]," Review of Finance, European Finance Association, vol. 26(1), pages 1-42.
    2. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    3. Niels Joachim Gormsen & Ralph S J Koijen & Nikolai Roussanov, 0. "Coronavirus: Impact on Stock Prices and Growth Expectations," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 574-597.
    4. Li, Kai & Tsou, Chi-Yang & Xu, Chenjie, 2023. "Learning and the capital age premium," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 76-90.
    5. Gonçalves, Andrei S., 2021. "The short duration premium," Journal of Financial Economics, Elsevier, vol. 141(3), pages 919-945.
    6. Jankauskas, Tomas, 2023. "Essays in empirical finance," Other publications TiSEM 4c319f87-ba97-44be-897e-1, Tilburg University, School of Economics and Management.
    7. Ye Li & Chen Wang, 2023. "Valuation Duration of the Stock Market," Papers 2310.07110, arXiv.org.

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