Duration‐Driven Returns

Abstract

We propose a duration-based explanation for the premia on major equity factors, including value, profitability, investment, low-risk, and payout factors. These factors invest in firms that earn most of their cash flows in the near future and could therefore be driven by a premium on near-future cash flows. We test this hypothesis using a novel data set of single-stock dividend futures, which are claims on dividends of individual firms. Consistent with our hypothesis, the expected Capital Asset Pricing Model alpha on individual cash flows decreases in maturity within a firm, and the alpha is not related to the above characteristics when controlling for maturity.IN THIS PAPER, WE PROVIDE a simple framework for understanding the major equity risk factors in asset pricing. We focus our analysis on value, profit, investment, low-risk, and payout factors. These five categories of risk factors have a large impact on stock prices given their high persistence, and they form the basis of leading factor models such as the Fama and French models. 1 Yet, the economics behind these factors are not well understood because the factors are hard to relate to common economic fundamentals. We relate the risk factors back to economic fundamentals, and identify the source of their high

Wealth Inequality in a Low Rate Environment

“…Indeed, there are reasons to think that firms owned by these entrepreneurs have a higher duration than the corporate sector as a whole, since their cash flows are typically negative before turning positive. To account for this fact, we use results from Gormsen and Lazarus (2023), who find that the average duration of the top 20% of the firms in CRSP (sorted according to ex ante measures of duration) is 46 years. Hence, as a robustness check, we consider an alternative duration calibration of 50 years.…”

Inferring Aggregate Market Expectations from the Cross Section of Stock Prices

“…The fourth is the expected long-term earnings growth (LTG) of a stock, computed as the median of long-term analyst growth forecasts. La Porta (1996) shows that high-LTG stocks underperform low-LTG stocks, Bordalo et al (2022) find that aggregate LTG t predicts the return spread between high-and low-LTG stocks, and Gormsen and Lazarus (2023) use LTG as the basis for their measure of equity duration. Because LTG is positively related to duration, we investigate whether discount rate shocks explain the return spread on LTG-sorted portfolios.…”

The Term Structure of Equity Yields - A Bottom-Up Approach

“…In addition, there are concerns about the liquidity of single-stock dividend futures, leading to stale prices. For a detailed discussion see Gormsen and Lazarus (2023).…”

“…This result mirrors prior empirical evidence by Schröder and Esterer (2016) that present a positive association between forecasted cash flow growth and expected stock returns when estimating the cash-flow duration for a large cross-section of firms. More recently, Gormsen and Lazarus (2023) present a negative relation between expected growth rates and ex-post observable (excess) returns. Since there are potentially many reasons for our results to differ from Gormsen and Lazarus (2023), appendix C presents a detailed analysis that reconciles the results of both studies.…”

“…More recently, Gormsen and Lazarus (2023) present a negative relation between expected growth rates and ex-post observable (excess) returns. Since there are potentially many reasons for our results to differ from Gormsen and Lazarus (2023), appendix C presents a detailed analysis that reconciles the results of both studies. The main reason for the difference in results is that Gormsen and Lazarus (2023) examine 10 value-weighted portfolios.…”