The Term Structure of Equity Risk Premia

Ravi Bansal, Shane Miller, Dongho Song and Amir Yaron

No 25690, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use traded equity dividend strips from U.S., Europe, and Japan from 2004-2017 to study the slope of the term structure of equity dividend risk premia. In the data, a robust finding is that the term structure of dividend risk premia (growth rates) is positively (negatively) sloped in expansions and negatively (positively) sloped in recessions. We develop a consumption-based regime switching model which matches these robust data-features and the historical probabilities of recession and expansion regimes. The unconditional population term structure of dividend-risk premia in the regime-switching model, as in standard asset pricing models (habits and long-run risks), is increasing with maturity. The regime-switching model also features a declining average term structure of dividend risk-premia if recessions are over-represented in a short sample, as is the case in the data sample from Europe and Japan. In sum, our analysis shows that the empirical evidence in dividend strips is entirely consistent with a positively sloped term structure of dividend risk-premia as implied by standard asset pricing models.

JEL-codes: E0 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-mac and nep-rmg
Note: AP CF EFG ME
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Citations: View citations in EconPapers (8)

Published as Ravi Bansal & Shane Miller & Dongho Song & Amir Yaron, 2021. "The term structure of equity risk premia," Journal of Financial Economics, vol 142(3), pages 1209-1228.

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Journal Article: The term structure of equity risk premia (2021)
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