Working Paper: NBER ID: w25690
Authors: Ravi Bansal; Shane Miller; Dongho Song; Amir Yaron
Abstract: We use traded equity dividend strips from U.S., Europe, and Japan from 2004-2017 to study the slope of the term structure of equity dividend risk premia. In the data, a robust finding is that the term structure of dividend risk premia (growth rates) is positively (negatively) sloped in expansions and negatively (positively) sloped in recessions. We develop a consumption-based regime switching model which matches these robust data-features and the historical probabilities of recession and expansion regimes. The unconditional population term structure of dividend-risk premia in the regime-switching model, as in standard asset pricing models (habits and long-run risks), is increasing with maturity. The regime-switching model also features a declining average term structure of dividend risk-premia if recessions are over-represented in a short sample, as is the case in the data sample from Europe and Japan. In sum, our analysis shows that the empirical evidence in dividend strips is entirely consistent with a positively sloped term structure of dividend risk-premia as implied by standard asset pricing models.
Keywords: equity risk premia; dividend strips; regime switching model; macrofinance
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic conditions (E66) | slope of dividend yields (G19) |
| economic expansions (E32) | slope of dividend yields (G19) |
| recessions (E32) | slope of dividend yields (G19) |
| slope of dividend yields (G19) | unconditional slope of equity dividend risk premia (G19) |
| dividend strips (G35) | predictions of standard asset pricing models (G17) |
| BVAR methods (C51) | causal identification (C50) |
| regime-switching model (C22) | representation of relationship between economic states and risk premia (G19) |