Download This PaperEquity Duration - Updated Duration of the S&P 500
7 Pages Posted: 4 Jan 2009
Date Written: July 2008
Abstract
In early 2004, we published a paper describing a simple model of asset allocation for pension plans that incorporates the concept of equity duration. We believe that a diversified portfolio of equities and bonds can be immunized and lowers the risk of deficits. Akin to the well-known concept of bond duration, equity duration measures the sensitivity of equities to interest rates. Although research on this subject is more recent and the concept is rarely used in practice, we believe equity duration is of significant importance in immunization, risk management, and asset allocation. We developed a simple model of equity duration that uses the dividend discount model and incorporates the sensitivity of growth to rates. Based on our empirical model, duration (or interest-rate sensitivity) is higher for high-growth stocks, stocks whose dividend growth is not sensitive to interest rates, and in low-discount rate environments. Standard & Poor's publishes, on an annual basis, a current report and a 30-year history of duration for the S&P 500. We acknowledge that equity duration estimation is an evolving science. We also believe that a regularly available and updated source of equity duration data will make this important metric more accessible for further research and practitioner use. We estimate the duration of the S&P 500 index to be 45 years at the middle of 2008. It has risen markedly in recent years, to record levels, suggesting that the market has become much more rate-sensitive.
Keywords: Equity Duration
JEL Classification: C52
Suggested Citation: Suggested Citation