Disaster recovery and the term structure of dividend strips

Michael Hasler and Roberto Marfe ()

Journal of Financial Economics, 2016, vol. 122, issue 1, 116-134

Abstract: Recent empirical findings document downward-sloping term structures of equity return volatility and risk premia. An equilibrium model with rare disasters followed by recoveries helps reconcile theory with empirical observations. Indeed, recoveries outweigh the upward-sloping effect of time-varying disaster intensity and expected growth, generating downward-sloping term structures of dividend growth risk, equity return volatility, and equity risk premia. In addition, the term structure of interest rates is upward-sloping when accounting for recoveries and downward-sloping otherwise. The model quantitatively reconciles high risk premia and a low risk-free rate with the shape of the term structures, which are at odds in other models.

Keywords: Recovery; Rare disasters; Term structures of equity; Dividend strips; Asset pricing puzzles (search for similar items in EconPapers)
JEL-codes: D51 D53 E21 G12 G13 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (26)

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Related works:
Working Paper: Disaster recovery and the term structure of dividend strips? (2016)
Working Paper: Disaster Recovery and the Term Structure of Dividend Strips (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:122:y:2016:i:1:p:116-134

DOI: 10.1016/j.jfineco.2015.11.002

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