Journal of Financial Economics Vol. 122 No. 1 2016
Disaster recovery and the term structure of dividend strips
Abstract
Recent empirical findings document downward-sloping term structures of equity return volatility and risk premia. An equilibrium model with rare disasters followed by recoveries helps reconcile theory with empirical observations. Indeed, recoveries outweigh the upward-sloping effect of time-varying disaster intensity and expected growth, generating downward-sloping term structures of dividend growth risk, equity return volatility, and equity risk premia. In addition, the term structure of interest rates is upward-sloping when accounting for recoveries and downward-sloping otherwise. The model quantitatively reconciles high risk premia and a low risk-free rate with the shape of the term structures, which are at odds in other models.
- DOI
- 10.1016/j.jfineco.2015.11.002
- Volume
- 122
- Issue
- 1
- Pages
- 116-134
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref