Implied Equity Duration: A New Measure of Equity Security Risk

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.