Implied Equity Duration: A Measure of Pandemic Shutdown Risk
48 Pages Posted: 10 Jun 2020 Last revised: 13 Jan 2021
Date Written: January 6, 2021
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: Suggested Citation