Implied Equity Duration: A Measure of Pandemic Shutdown Risk

48 Pages Posted: 10 Jun 2020 Last revised: 13 Jan 2021

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Ryan Erhard

University of Southern California - Leventhal School of Accounting

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Mark T. Soliman

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 6, 2021

Abstract

Implied equity duration was originally developed to analyze the sensitivity of equity prices to discount rate changes. We demonstrate that implied equity duration is also useful for analyzing the sensitivity of equity prices to pandemic shutdowns. Pandemic shutdowns primarily impact short-term cash flows, thus they have a greater impact on low duration equities. We show that implied equity duration has a strong positive relation to US equity returns and analyst forecast revisions during the onset of the 2020 COVID-19 shutdown. Our analysis also demonstrates that the underperformance of 'value' stocks during this period is a rational response to their lower durations.

Keywords: Equity, Duration, Value investing, COVID-19, Book-to-market, Earnings-to-price, Pandemic

JEL Classification: M41, C23, D21, G32

Suggested Citation

Dechow, Patricia and Erhard, Ryan and Sloan, Richard G. and Soliman, Mark T., Implied Equity Duration: A Measure of Pandemic Shutdown Risk (January 6, 2021). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3623588 or http://dx.doi.org/10.2139/ssrn.3623588

Patricia Dechow

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Ryan Erhard (Contact Author)

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

Los Angeles, CA 90089-0441
United States

Richard G. Sloan

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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