The term structure of equity risk premia

Ravi Bansal, Shane Miller, Dongho Song and Amir Yaron

Journal of Financial Economics, 2021, vol. 142, issue 3, 1209-1228

Abstract: We estimate a regime-switching model for the equity term structure with Bayesian methods. Our approach accounts for the data sample being unrepresentative of the population distribution of regimes. We find that (i) the term structure of expected equity dividend strip returns is downward sloping in recessions and upward sloping in expansions, and (ii) the unconditional term structure of expected equity returns is positively sloped. Our estimation shows that the sample unrepresentativeness induces a downward bias in the estimate of the equity term structure slope. We present a regime-switching consumption-based asset-pricing model that matches the empirical findings.

Keywords: Asset pricing; Business cycle phases; Dividend strips; Equity term structure; Regime switching (search for similar items in EconPapers)
JEL-codes: D51 E21 G12 G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Working Paper: The Term Structure of Equity Risk Premia (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:3:p:1209-1228

DOI: 10.1016/j.jfineco.2021.05.043

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