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Time Variation of the Equity Term Structure
Author(s) -
GORMSEN NIELS JOACHIM
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13020
Subject(s) - term (time) , econometrics , dividend , variation (astronomy) , equity (law) , economics , maturity (psychological) , habit , mathematics , physics , finance , psychology , developmental psychology , quantum mechanics , astrophysics , political science , law , psychotherapist
I study the term structure of one‐period expected returns on dividend claims with different maturity. I find that the slope of the term structure is countercyclical. The countercyclical variation is consistent with theories of long‐run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. More generally, the average and cyclicality of the slope are hard to reconcile with models with a single risk factor. I introduce a model with two priced factors to solve the puzzle.