Some time ago, I wrote about the research of Jules van Binsbergen who showed that you can replicate the performance of the S&P 500 with a series of Treasury strips that pay the amount of the expected dividend at maturity. In essence, you replace uncertain future dividends with the certain payback of zero-coupon Treasuries and end up with less risk and the same or even higher return. And with lower volatility to boot. This research creates all kinds of problems from a theoretical standpoint because it purports to show that equity markets do not compensate investors for the risk of future dividend cuts or increases. And more importantly, it shows that stock market returns are essentially compensation for changing interest rates and not for any other risks. All that seems to matter for aggregate stock markets is where interest rates and inflation are going.
Van Binsbergen, like Koijen, is unafraid to tackle the core assumptions that many of us have held since our university days. This is another good example - - thanks for bringing it to our attention, Joachim!
Loved the beginning but was a bit surprised by the ending.
Should advice have been:
Construct a bond portfolio to replicate FTSE?
Van Binsbergen, like Koijen, is unafraid to tackle the core assumptions that many of us have held since our university days. This is another good example - - thanks for bringing it to our attention, Joachim!
Any views on the Australian market in the context of this research?