Risk and return of short-duration equity investments |
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| Affiliation: | 1. WU Vienna University of Economics and Business, Department of Finance, Accounting and Statistics, Welthandelsplatz 1, A-1020 Vienna, Austria;2. ZZ Vermögensverwaltung, Coburgbastei 4, A-1010 Vienna, Austria;1. Department of Finance, School of Business and Administration, American University of Sharjah, Sharjah, United Arab Emirates;2. USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon;3. Center for Energy and Sustainable Development, Montpellier Business School, Montpellier, France;4. Department of Accounting, School of Business and Administration, American University of Sharjah, Sharjah, United Arab Emirates;1. Department of Finance and International Business, Fu Jen Catholic University, No. 510, Jhongjheng Rd., Sinjhuang Dist., New Taipei City 24205, Taiwan, ROC;2. Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei City 10617, Taiwan, ROC |
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| Abstract: | We analyze short-duration equity investments using traded claims on index dividends. We show that investment strategies with constant short maturity outperform a systematic long position in the underlying equity index on a risk-adjusted basis and in absolute terms. Furthermore, we find higher international diversification benefits for this strategy, compared to traditional equity indices. We relate the observed outperformance to market downside exposure, in particular an options-based downside risk factor. We use three alternative models to extract ex-ante risk premia implied in the prices of dividend derivatives and find evidence for substantial time variation in expected returns. |
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