Market uncertainty and the short duration premium in the Japanese stock market

We present novel insights into the cross-section of stock returns by examining the reversals of risk-adjusted returns on duration-sorted portfolios, as are particularly observed during the COVID-19 pandemic and are common during periods of high market uncertainty. Our analysis, conducted over the Japanese stock market from 1990 to 2022, reveals that market uncertainty significantly explains the returns of the long-short duration portfolio. In addition, we suggest that the countercyclical behavior of the equity term structure may reflect the market’s response to periods of substantially higher uncertainty. This study contributes to the understanding of the relationship between the timing of cash flows and stock returns and offers valuable implications for studies on the cross-section of stock returns.