Abstract:

Recent empirical evidence of a downward-sloping term structure of equity risk in \cite{van2012timing} and \cite{van2013equity} challenges many leading asset pricing models. This paper reassesses empirical facts using different sources of dividend data across many equity indices and proposes the supply-based asset pricing model as an alternative theory. In particular, we argue that localized market participation in financial activities partially explains the term structure and time variation of implied equity dividends. Equity derivative products are major sources of dividend supply shocks, resulting in the variation in implied dividends across time and across equity indices. Using issuance data, we show that the implied index dividend term structure is somewhat sensitive to structural flows from equity structured product issuance.