The Term Structure of Equity Yields - A Bottom-Up Approach

This paper proposes a new approach to estimate an expected equity yield curve. Instead of deriving the equity yield curve from market dividend futures, we aggregate equity yields of individual firms over the market. This approach allows studying the composition effect that drives the shape of the equity yield curve. We find that during the period from 1990 to 2019, the U.S. equity yield curve was, on average, upward-sloping. As companies with high equity yields were expected to grow at higher rates than companies with low equity yields, high-yield companies dominate the market when increasing the investment time horizon. Together with the concave shape of the bond yield curve, the market equity yield curve was upward-sloping