Implied Equity Duration: A New Measure of Equity Security Risk

Posted: 13 Jun 2004

See all articles by Mark T. Soliman

Mark T. Soliman

University of Southern California - Marshall School of Business

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

Abstract

Duration is an important and well-established risk characteristic for fixed income securities. We use recent developments in financial statement analysis research to construct a measure of duration for equity securities. We find that the standard empirical predictions and results for fixed income securities extend to equity securities. We show that stock price volatility and stock beta are both positively correlated with equity duration. Moreover, estimates of common shocks to expected equity returns extracted using our measure of equity duration capture a strong common factor in stock returns. Additional analysis shows that the book-to-market ratio provides a crude measure of equity duration and that our more refined measure of equity duration subsumes the Fama and French (1993) book-to-market factor in stock returns. Our research shows how structured financial statement analysis can be used to construct superior measures of equity security risk.

Keywords: Duration, asset pricing, risk, financial statement analysis

JEL Classification: G12, G14, M41

Suggested Citation

Soliman, Mark T. and Dechow, Patricia M. and Sloan, Richard G., Implied Equity Duration: A New Measure of Equity Security Risk. Review of Accounting Studies, Vol. 9, No. 2-3, pp. 197-228, June-September 2004. Available at SSRN: https://ssrn.com/abstract=551647

Mark T. Soliman

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

2250 Alcazar Street
Los Angeles, CA 90089
United States

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

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