Holding Period Effects in Dividend Strip Returns

Abstract

We estimate short-term dividend strip prices from 27 years of S&P 500 index options data (1996-2022). We use option-implied interest rates when estimating strip prices and longer holding period returns to mitigate measurement error. We find that Sharpe ratios for short-term strips are similar to or higher than Sharpe ratios for the market. Short-term strips also have a low market beta and a positive alpha. Over the business cycle, realized term premiums (i.e., the difference between market and strip returns) and the term structure of Sharpe ratios move countercyclically, whereas the term structure of alphas moves procyclically.