Duration-Based Stock Valuation: Reassessing Stock Market Performance and Volatility

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.

Keywords: Secular Stagnation, Stock Market Performance, Excess Volatility, Duration, Dividend Risk Premium, COVID-19