The Maturity Premium

Maria Chaderina, Patrick Weiß, Josef Zechner

Publication: Scientific journalJournal articlepeer-review

Abstract

We show that firms with longer debt maturities earn risk premia not explained by unconditional factors. Embedding dynamic capital structure choices in an asset-pricing framework where the market price of risk evolves with the business cycle, we find that firms with long-term debt exhibit more countercyclical leverage. The induced covariance between betas and the market price of risk generates a maturity premium similar in size to our empirical estimate of 0.21% per month. We also provide direct evidence for the model mechanism and confirm that the maturity premium is consistent with observed leverage dynamics of long- and short-maturity firms.
Original languageEnglish
Pages (from-to)670-694
JournalJournal of Financial Economics
Volume144
Issue number2
DOIs
Publication statusPublished - May 2022

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