Essays on the Temporal Structure of Risk

Abstract

I provide new evidence on the properties of the temporal structure of risk, which answers whether more distant claims to macroeconomic growth are more or less risky than near-term claims. In the first chapter, I use replication and no-arbitrage to estimate within-firm variation in equity expected returns across horizons. I demonstrate that a low dimensional set of returns and state variables, all characteristics of liquid, exchange-traded equity securities, provide a close replication of claims to firm capital gains at different horizons. Calculating returns from the no-arbitrage prices of these claims, I show that the term structure of risk premia is unconditionally upward-sloping for commonly used test assets like the market and book-to-market sorted portfolios. In joint work in the second chapter, 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, our 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. In sum, our analysis shows that the empirical evidence in dividend strips is consistent with a positively sloped term structure of dividend risk-premia as implied by standard asset pricing models.