Implied Equity Duration: A New Measure of Equity Security Risk

67 Pages Posted: 3 Jul 2001

See all articles by Patricia M. Dechow

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: June 2001

Abstract

We derive a measure of implied equity duration as a natural extension of the traditional measure of bond duration and develop an algorithm for the empirical estimation of implied equity duration. We show that the standard empirical predictions and results for bond duration hold for our measure of implied equity duration and that implied equity duration represents an important common factor in stock returns. We also show that the book-to-market factor advocated by Fama and French (1993) acts as a noisy proxy for an underlying duration factor. Finally, we provide evidence that the long-run equity yield curve is downward sloping for durations up to 20 years. Our results suggest that existing empirical tests of asset pricing models using short holding period equity returns are misspecified.

Keywords: Duration, risk, factors, premium, valuation, returns

JEL Classification: M4, G1

Suggested Citation

Dechow, Patricia M. and Sloan, Richard G. and Soliman, Mark T., Implied Equity Duration: A New Measure of Equity Security Risk (June 2001). Available at SSRN: https://ssrn.com/abstract=271989 or http://dx.doi.org/10.2139/ssrn.271989

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Richard G. Sloan (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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