DP10633 The Term Structure of Returns: Facts and Theory

Author(s): Ralph Koijen, Jules H. van Binsbergen
Publication Date: May 2015
Keyword(s): corporate bonds, equity, fixed income, term structure, volatility
JEL(s): G12, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10633

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.