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The term structure of returns: Facts and theory

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  • van Binsbergen, Jules H.
  • Koijen, Ralph S.J.

Abstract

We summarize and extend the new literature on the term structure of equity. Short-term equity claims, or dividend strips, have higher average returns and Sharpe ratios than the aggregate stock market. The returns on short-term dividend claims are risky as measured by volatility, but safe as measured by market beta. These facts are hard to reconcile with traditional macro-finance models and we provide an overview of new models that can reproduce some of these facts. We relate our evidence on dividend strips to facts about other asset classes such as nominal and corporate bonds, volatility, and housing. We discuss the broader economic implications of our findings by linking the term structure of returns to real economic decisions such as hiring and investment. We conclude with an outline of empirical and theoretical extensions that we consider interesting avenues for future research.

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  • van Binsbergen, Jules H. & Koijen, Ralph S.J., 2017. "The term structure of returns: Facts and theory," Journal of Financial Economics, Elsevier, vol. 124(1), pages 1-21.
  • Handle: RePEc:eee:jfinec:v:124:y:2017:i:1:p:1-21
    DOI: 10.1016/j.jfineco.2017.01.009
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    2. Olkhov, Victor, 2018. "Expectations, Price Fluctuations and Lorenz Attractor," MPRA Paper 89105, University Library of Munich, Germany.
    3. Ravi Bansal & Shane Miller & Dongho Song & Amir Yaron, 2019. "The Term Structure of Equity Risk Premia," NBER Working Papers 25690, National Bureau of Economic Research, Inc.
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    8. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
    9. Yichuan Wang & Thomas M. Eisenbach & Martin C. Schmalz & Marianne Andries, 2015. "The term structure of the price of variance risk," Staff Reports 736, Federal Reserve Bank of New York.
    10. TAKAMIZAWA, Hideyuki, 2018. "An Equilibrium Model of Term Structures of Bonds and Equities," Working Paper Series G-1-19, Hitotsubashi University Center for Financial Research.
    11. Dew-Becker, Ian & Giglio, Stefano & Le, Anh & Rodriguez, Marius, 2017. "The price of variance risk," Journal of Financial Economics, Elsevier, vol. 123(2), pages 225-250.
    12. Mohrschladt, Hannes & Nolte, Sven, 2018. "A new risk factor based on equity duration," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 126-135.
    13. John H. Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985.
    14. Roberto Marfè, 2016. "Labor Rigidity, Ination Risk and Bond Returns," Carlo Alberto Notebooks 461, Collegio Carlo Alberto.
    15. Olkhov, Victor, 2019. "Econophysics of Asset Price, Return and Multiple Expectations," MPRA Paper 91587, University Library of Munich, Germany.
    16. Pierlauro Lopez, 2016. "Welfare Implications of the Term Structure of Returns: Should Central Banks Fill Gaps or Remove Volatility?," 2016 Meeting Papers 742, Society for Economic Dynamics.
    17. Taeyoung Doh & Shu Wu, 2016. "The Equilibrium Term Structure of Equity and Interest Rates," Research Working Paper RWP 16-11, Federal Reserve Bank of Kansas City, revised 30 Nov 2016.
    18. Koijen, Ralph S.J. & Moskowitz, Tobias J. & Pedersen, Lasse Heje & Vrugt, Evert B., 2018. "Carry," Journal of Financial Economics, Elsevier, vol. 127(2), pages 197-225.
    19. Likuan Qin & Vadim Linetsky & Yutian Nie, 2016. "Long Forward Probabilities, Recovery and the Term Structure of Bond Risk Premiums," Papers 1601.06477, arXiv.org.
    20. Cejnek, Georg & Randl, Otto, 2016. "Risk and return of short-duration equity investments," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 181-198.
    21. Hasler, Michael & Khapko, Mariana & Marfè, Roberto, 2019. "Should investors learn about the timing of equity risk?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 182-204.
    22. Guihai Zhao, 2018. "Ambiguity, Nominal Bond Yields and Real Bond Yields," Staff Working Papers 18-24, Bank of Canada.

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    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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