A note on the relation between the equity risk premium and the term structure

We show that nonlinearity in the relation between the equity premium and the slope of the term structure has two dimensions, namely asymmetry between positively and negatively sloped term structures, and regime switching. Asymmetry is uncovered only if volatility regime switching is allowed in equity premium dynamics. Predictive power for the equity premium arises only from the positively sloped term structure, and only in periods of low volatility of the equity premium.