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The short duration premium

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  • Gonçalves, Andrei S.

Abstract

Stocks of firms with cash flows concentrated in the short term (i.e., short duration stocks) pay a large premium over long duration stocks. I empirically demonstrate that this premium (i) is long-lived and strong even among large firms, (ii) subsumes the value and profitability premia, and (iii) exposes investors to variation in expected returns, especially in times when the premium is high. These facts are consistent with an intertemporal model in which the marginal (long-term) investor dislikes expected return declines as they lead to lower expected wealth growth. The model also captures the positive relation between risk premia and bond duration.

Suggested Citation

  • Gonçalves, Andrei S., 2021. "The short duration premium," Journal of Financial Economics, Elsevier, vol. 141(3), pages 919-945.
    • Handle: RePEc:eee:jfinec:v:141:y:2021:i:3:p:919-945
    DOI: 10.1016/j.jfineco.2021.04.019
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    More about this item

    Keywords

    Equity duration; Term structure of risk premia; Reinvestment risk; Intertemporal CAPM; Value and profitability premia;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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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