The short duration premium

Andrei S. Gonçalves

Journal of Financial Economics, 2021, vol. 141, issue 3, 919-945

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.

Keywords: Equity duration; Term structure of risk premia; Reinvestment risk; Intertemporal CAPM; Value and profitability premia (search for similar items in EconPapers)
JEL-codes: E43 E44 G10 G11 G12 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:3:p:919-945

DOI: 10.1016/j.jfineco.2021.04.019

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