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Risk and return of short-duration equity investments

Author

Listed:
  • Cejnek, Georg
  • Randl, Otto

Abstract

We analyze short-duration equity investments using traded claims on index dividends. We show that investment strategies with constant short maturity outperform a systematic long position in the underlying equity index on a risk-adjusted basis and in absolute terms. Furthermore, we find higher international diversification benefits for this strategy, compared to traditional equity indices. We relate the observed outperformance to market downside exposure, in particular an options-based downside risk factor. We use three alternative models to extract ex-ante risk premia implied in the prices of dividend derivatives and find evidence for substantial time variation in expected returns.

Suggested Citation

  • Cejnek, Georg & Randl, Otto, 2016. "Risk and return of short-duration equity investments," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 181-198.
  • Handle: RePEc:eee:empfin:v:36:y:2016:i:c:p:181-198
    DOI: 10.1016/j.jempfin.2016.01.017
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    References listed on IDEAS

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    More about this item

    Keywords

    Dividend derivatives; Short-maturity anomaly; Term structure of equity risk premia; Downside risk; Investment strategy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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