Equity Duration: A Puzzle on High Dividend Stocks

41 Pages Posted: 24 Oct 2015 Last revised: 26 Oct 2015

Hao Jiang

Michigan State University

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Date Written: October 23, 2015

Abstract

This paper examines the duration of individual stocks, i.e., the sensitivities of their prices to changes in interest rates. Counter to the intuition from the dividend discount model, we find that stocks that pay higher dividends tend to have longer duration, experiencing greater price declines (increases) when interest rates rise (fall). Using data on mutual fund flows and institutional investor holdings, we find evidence of "reaching for dividends": when interest rates fall, investors switch more funds to income-oriented equity mutual funds, and the weights of high dividend stocks in the portfolios of income-dependent institutions such as income funds and insurance companies increase. The resulting higher demand for high dividend stocks appears to increase the sensitivities of their prices to interest rate changes, thereby contributing to their long duration puzzle.

Keywords: Equity Duration, Interest Rate Risk, Dividends, Income Funds, Flows, Institutional Investors

JEL Classification: G10, G11, G12, G23

Suggested Citation

Jiang, Hao and Sun, Zheng, Equity Duration: A Puzzle on High Dividend Stocks (October 23, 2015). Available at SSRN: https://ssrn.com/abstract=2678958 or http://dx.doi.org/10.2139/ssrn.2678958

Hao Jiang (Contact Author)

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Zheng Sun

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

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