Equity Duration

Authors

• Patricia M. Dechow
  The Carleton H. Griffin Deloitte & Touche LLP Collegiate Professor of Accounting,  
  Stephen M. Ross School of Business
• Richard G. Sloan   
  Victor L. Bernard PricewaterhouseCoopers LLP Collegiate Professor of Accounting and Finance
  Stephen M. Ross School of Business
• Mark T. Soliman   
  Ph.D. Candidate
  Stephen M. Ross School of Business

Abstract

We derive an expression for implied equity duration by adapting the traditional expression for bond duration and develop an algorithm for its empirical estimation. We find that the standard empirical predictions and results for bond duration hold for our measure of implied equity duration. Stock return volatilities and betas are increasing in implied equity duration. Moreover, estimates of common shocks to expected equity returns extracted using our measure of implied equity duration capture a strong common factor in stock returns. We also show that book-to-market ratio represents a special case of our expression for implied equity duration that imposes restrictive assumptions on the evolution of future cash flows. Consequently, our implied equity duration framework provides an explanation for the empirical properties of the book-to-market related factor documented Fama and French (1993). Empirical tests confirm that the common factor related to our more general measure of implied equity duration dominates and subsumes the common factor related to book-to-market.

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Creation: This Version:  May 2002
Key Words: Duration, Asset Pricing, Risk
KEL classification:  G12; G14; M41