The Equity Risk Premium and the Low Frequency of the Term Spread

Abstract

Michael Weber, as well as of participants at the Católica Porto Business School seminar, the HECER time series econometrics seminar, the Bank of Finland seminar, the Bank of England seminar, the 17 th SAET Conference on Current Trends in Economics (Faro), the 11 th Annual Meeting of the Portuguese Economic Journal (Vila Real), the 25 th Finance Forum (Barcelona), the II Workshop on Financial Mathematics Models and Statistical Methods at the FCT/UNL (Lisbon), the 5 th Applied Macroeconometric Workshop (Labex MME-DII, CEPN and INFER network), the ECB WGEM November 2017 meeting, the IV Christmas Workshop in Accounting and Finance (Universidade do Porto) and the Inquire Europe 2018 Spring conference (Dresden). The views expressed are those of the authors and do not necessarily reect those of the Bank of Finland. Faria gratefully acknowledge nancial support from Fundação para a Ciência e Tecnologia through project UID/GES/00731/2016.

Equity Risk Factors for the Long and Short Run: Pricing and Performance at Different Frequencies

“…The percentage variance shows that the credit spread and term spread are relatively low frequency factors, since the lower frequency components (3 to 8 years and greater than 8 years) contain over 30% of the monthly variation. This is in line with Faria and Verona (2018), who find that the business cycle component of the term spread contains the majority of the variation. For Fama-French factors and both expected-and unexpected inflation, we see that over 75% of the monthly variation is captured in the less-than-one-year pass band.…”