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 similar realized return performance as their stock counterparts while also exhibiting similar or higher levels of volatility. These results provide novel insights regarding the equity risk premium and excess volatility puzzles (bubbles) and their measurement. I present several potential explanations, including secular stagnation, and discuss further the implications for macroeconomics, monetary economics, asset pricing, and corporate finance.