Is There An Equity Duration Premium?
71 Pages Posted: 13 Jul 2022 Last revised: 2 Aug 2022
Date Written: July 8, 2022
Equity duration is a measure of discount-rate sensitivity that is driven by both, stock-specific cash-flow timing and stock-specific discount-rate levels. Established measures of equity duration using market-price information derive their predictive power for returns from using market-implied discount rates. We introduce new measures of pure cash-flow timing which disentangle discount-rate level from cash-flow timing information. Our results indicate an unconditionally flat relationship between timing and average returns. However, it turns out that in recessions (expansion episodes), there is a negative (positive) relation between cash-flow timing and average stock returns.
Keywords: Equity duration, cash flow timing, term structure of equity, cross-section of expected returns
JEL Classification: G12, G17, G23
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