As part of the series of the "Finance Research Seminar", VGSF welcomes Jules van Binsbergen from Wharton, University of Pennsylvania to present his research paper.
Duration-Based Stock Valuation
Interest rates of all maturities have dropped to all-time low levels around the world. These unexpected shocks to discount rates have an important effect on the valuation of long duration assets. To quantify this effect, I construct a number of counterfactual fixed income portfolios that match the duration of the dividend strips of the aggregate stock market. I show that such fixed income portfolios have performed as well, if not better, than the U.S. stock market in the past several decades, while exhibiting similar levels of volatility. Investors have therefore received little to no compensation for taking long duration nominal dividend risk in the past half century. I discuss several explanations, including a secular trend in economic growth, dividends' potential to hedge against inflation, as well as the diversification of dividend risk across maturities. These results also have important implications for the cross-section of stock returns.