Dynamic Equity Slope

This paper empirically documents that expected growth volatility is a key driver of the equity term structure dynamics. A general equilibrium model jointly explains four important patterns: (i) a potentially negative unconditional equity term premium, (ii) countercyclical equity term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and at with the horizon. The eco- nomic mechanism hinges on the interaction between heteroscedastic long-run growth| which leads to countercyclical risk premia|and homoscedastic short-term shocks under limited market participation|which produce sizable risk premia to short-term cash ows. The equity slope dynamics hold irrespective of the sign of its unconditional average.