A New Measure of Equity Duration: The Duration-Based Explanation of the Value Premium Revisited
University of London - Birkbeck College
Bank J. Safra Sarasin
December 18, 2012
This paper uses analyst forecasts to estimate a share's equity duration, a measure of a company's average cash-flow maturity. We find that short-duration equity is associated with high expected and realized returns, which cannot be attributed to the shares' systematic risk exposure as implied by the market beta. Instead, this paper shows that equity duration is a priced risk factor that is closely related to the Fama-French value indicator B/M ratio. The results suggest that the B/M ratio can be conceived as a simple proxy for a more fundamental cash-flow risk factor captured
by a firm's equity duration.
Number of Pages in PDF File: 28
Keywords: equity duration, value premium, analyst forecasts, B/M ratio, cash-flow maturity, implied cost of capital
JEL Classification: G12, M41
Date posted: September 17, 2012 ; Last revised: May 18, 2013
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