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Can Reinvestment Risk Explain the Dividend and Bond Term Structures?


  • Goncalves, Andrei

    (Ohio State University)


Contradicting leading asset pricing models, recent evidence indicates the term structure of dividend discount rates is downward sloping despite the typical upward sloping bond yield curve. This paper empirically shows that reinvestment risk explains both the dividend and bond term structures. Intuitively, dividend claims hedge equity reinvestment risk because dividend present values rise as expected returns decline. This hedge is more effective for longer-term dividend claims because they are more sensitive to discount rate variation, resulting in a downward sloping dividend term structure. For bonds, as expected equity returns decline, nominal interest rates rise, and bond prices fall. Consequently, bonds are exposed to equity reinvestment risk, and this exposure increases with duration, giving rise to an upward sloping bond term structure.

Suggested Citation

  • Goncalves, Andrei, 2017. "Can Reinvestment Risk Explain the Dividend and Bond Term Structures?," Working Paper Series 2017-14, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2017-14

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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