Equity Duration – Updated Duration of the S&P 500

Abstract

In early 2004, we published a paper which described a simple model of asset allocation for pension plans that incorporated the concept of equity duration. We believe that a diversified portfolio of equities and bonds can be immunized and lower 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 has only been done more recently 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 highgrowth stocks, stocks whose dividend growth is not sensitive to interest rates, and stocks in low–discount rate environments.

Annually, Standard & Poor’s publishes a current report and a 37-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 34 years at the middle of 2009. The index has retreated from its all-time high in 2008, but remains quite elevated by historical standards.

Keywords: equity duration

JEL Classification: C1