The Bond, Equity, and Real Estate Term Structures

Abstract

We construct a Stochastic Discount Factor (SDF) that prices bond, equity, and real estate portfolios sorted on cash flow duration. Using this SDF and the dynamics of cash flow yields in these three asset classes, we estimate the bond, equity, and real estate term structures monthly from 1974 to 2019. We find that while (nominally) safe and risky cash flows have risk premia term structures that are upward sloping on average and move together over time, the term structure dynamics are fundamentally different after we remove the safe component of the risky cash flows. Specifically, equity and real estate maturity-matched risk premia, on average, increase over short maturities but decline over long maturities. Moreover, their term structures comove positively with each other but negatively with the bond term structure.