The Implied Equity Term Structure

Lieven Baele, Joost Driessen () and Tomas Jankauskas
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Tomas Jankauskas: https://www.newyorkfed.org/research/economists/Jankauskas

No 1203, Staff Reports from Federal Reserve Bank of New York

Abstract: We propose a new methodology to estimate the equity term structure. Instead of using realized returns of dividend assets, we generalize the implied cost of capital approach and imply the term structure of ex-ante expected returns from the cross-section of observed stock prices and projected firm-level cash flows. Using US data for 1980-2024, we find an unconditionally upward sloping term structure of risk premia with rich cross-sectional patterns in the size, value and credit risk dimensions. Strikingly, value firms and speculative-grade firms have flat or even downward-sloping term structures. We also detect that the term structure flattens out in recessions.

Keywords: cross-section; equity term structure; implied cost of capital (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Pages: 64
Date: 2026-09-01
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DOI: 10.59576/sr.1203

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