The Term Structure of Returns: Facts and Theory
We summarize and extend the new literature on the term structure of equity. Short-term equity claims, or dividend strips, have on average significantly higher returns than the aggregate stock market. The returns on short-term dividend claims are risky as measured by volatility, but safe as measured by market beta. These facts are hard to reconcile with traditional macro-finance models and we provide an overview of new models that can reproduce some of these facts. We relate our evidence on dividend strips to facts about other asset classes such as nominal and corporate bonds, volatility, and housing. We conclude by discussing the broader economic implications by linking the term structure of returns to real economic decisions such as hiring and investment.
For discussions on this topic over the years, we thank Marianne Andries, Jonathan Berk, Michael Jarda Borovicka, Brandt, John Campbell, Darrell Duffie, Xavier Gabaix, Stefano Giglio, Francisco Gomes, Lars Hansen, John Heaton, Wouter Hueskes, Minsoo Kim, Howard Kung, Martin Lettau, Sydney Ludvigson, Hanno Lustig, Matteo Maggiori, Toby Moskowitz, Lasse Pedersen, Monika Piazzesi, Martin Schmalz, Ken Singleton, Stijn Van Nieuwerburgh, Evert Vrugt, Jessica Wachter, and Moto Yogo. We thank Jonathan Wright, Luis Viceira, Carolin Pflueger, and Christian Glissman-Mueller for generously sharing data for this project. Koijen acknowledges financial support from the European Research Council (grant 338082). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.