Duration-Based Stock Valuation

Abstract

Using a panel of international government bond data, I construct fixed income portfolios that match the duration of the dividend strips of the local aggregate stock market index. I find that these bond portfolios have performed as well as their stock counterparts in the past half century while exhibiting similar (and often higher) levels of volatility. These results provide a novel perspective on both the equity risk premium and excess volatility puzzles (bubbles). I present several potential explanations, and discuss further the implications for macroeconomics, monetary economics, asset pricing, and corporate finance. The results cannot be explained away by net stock repurchases or inflation.