Equity duration and predictability

Since 1945, a silent revolution has taken place in the way equity markets move. The classic view of stock prices responding mainly to changes in expected dividends no longer holds. Instead, expected returns now dominate. This paper digs into the reason: equity duration has increased dramatically. As firms reinvest more and delay payouts to the future, asset prices become more sensitive to changes in expected returns rather than fundamentals. The result? A market increasingly shaped by shifting risk appetite, not earnings. These insights, which stretch across four centuries of financial history, offer deep implications for long-term investors, factor strategy design, and even how we think about market efficiency itself.

Equity duration and predictability

• Benjamin Golez and Peter Koudijs
• The Journal of Finance , 2025
• A version of this paper can be found here
• Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

Key Academic Insights

Duration Drives Dominance of Expected Returns

Before 1945, dividend growth and expected returns contributed almost equally to price fluctuations. After 1945, expected returns took over. This coincides with a shift in corporate payout policy: dividend payout ratios dropped from over 90% to less than 50%, extending the market’s effective duration.

Short vs Long-Duration Assets Behave Differently

Using S&P 500 dividend strips, the authors show that short-duration assets (like 18-month dividend claims) are still influenced by both expected returns and dividend growth. But for the broad market (a long-duration asset), over 90% of price variation is attributed to expected return changes.

Persistence and Variance Matter

Why does duration increase expected return importance? Because expected returns are both (a) more persistent and (b) more volatile over long horizons than dividend growth rates. Long-duration assets magnify these traits—making expected returns the primary driver.

Cross-Sectional Confirmation

Sorting U.S. stocks by payout ratio, they find:

• High-payout (short-duration) firms: only 54% of price variation comes from expected returns
• Low-payout (high-duration) firms: nearly 100%
  This reinforces the time-series findings with powerful cross-sectional evidence.

A Simple Present Value Model Explains It All

The authors build a dynamic present value model with time-varying duration. Calibrated to historical data, it shows that increased duration after 1945 alone can explain up to 70% of the rise in expected return dominance.

Practical Applications for Investment Advisors

Rethink Risk in Growth Stocks

Growth stocks are inherently long-duration assets. Their prices will be more sensitive to changes in discount rates than fundamentals. Advisors should be aware that volatility in these names may reflect shifting sentiment more than business performance.

Model-Based Strategies: Factor Exposure May Be Misleading

Traditional factor strategies that rely on dividend or earnings signals may underperform if they ignore the time horizon of cash flows. For instance, valuation metrics may become less predictive as equity duration increases.

Duration-Aware Asset Allocation

If you’re managing a multi-asset portfolio, recognizing that equity duration varies over time (and across firms) is essential. Particularly during periods of rising rates or macro volatility, understanding this risk channel can help optimize timing and sizing of exposures.

How to Explain This to Clients

“Most people think stock prices move when company profits rise or fall. That used to be true. But today, companies pay less in dividends and more of your return comes later. That means prices swing more when investors change their expectations of future returns—often due to mood or macro signals—than actual earnings. In other words, markets today react more to how people feel about the future than what companies are doing today.”

The Most Important Chart from the Paper

Figure 3: Summary—ER vs. Payout Ratio (Cross-section and Time Series)
This figure plots the share of price variation due to expected returns (ER) against payout ratios across both time and stock portfolios. The relationship is striking: as payout ratios fall, ER rises sharply. The line of best fit implies that every 10% drop in payout increases ER by about 10 percentage points. This figure visually ties together the core thesis—duration explains why return expectations dominate.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

Abstract

After 1945, expected returns have started to dominate the variation in equity price movements, leaving little room for expected dividend growth. An increase in equity duration can help explain this change. Expected returns vary more for payouts further into the future. Furthermore, because expected returns are more persistent than growth rates, they are more important for longer-duration assets. We provide empirical support for this explanation across three datasets: dividend strips, the long time series for the aggregate market, and the cross-section of stocks. A simple present value model with time-varying duration can largely explain the post-1945 dominance of expected returns.