The Term Structure of Equity Returns and Duration Premium

This study investigates the relationship between equity duration, stock liquidity, and market conditions, revealing that short-duration portfolios consistently deliver higher average returns compared to their long-duration counterparts, regardless of firm size, book-to-market ratios, and liquidity. The size effect and value effect partially explain the short-duration premium, but it persists even after controlling for the value factor. We uncover dynamic patterns in the equity term structures, which exhibit a downward slope during periods of economic stability but flatten or even become upward sloping during peak and recovery phases, respectively. The short-duration premium remains robust even during extreme economic conditions. Additionally, we shed light on the link between equity duration and liquidity, finding that firms with shorter equity duration tend to have lower liquidity. While liquidity explains a significant portion of the excess returns, the short-duration premium remains prominently observed after controlled for liquidity factor