The Derivation of a New Model of Equity Duration
AbstractThis paper sets out to address the issue of equity duration, one of several risk measures available for asset and liability management. Equity duration, as derived from the use of traditional dividend discount models, results in extremely long duration estimated for equities - often in excess of 50 years for growth stocks. Leibowitz, in his seminal paper (1986), identified an alternative framework for assessing equity duration empirically. This methodology yields equity duration measures more consistent with the experience of practitioners, implying that equities behave as if they are much shorter duration instruments. In our paper, based on an application to UK data, we develop the intuition behind the Leibowitz approach to generate equity duration as a by-product of asset pricing, Our analysis suggests that the equity premium puzzle may comprise an important element in reconciling the Leibowitz approach to equity duration, with the more traditional dividend discount model alternative.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0104.
Date of creation: May 2001
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Web page: http://www.econ.cam.ac.uk/index.htm
asset pricing; dividends; duration; equity valuation; pensions;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-06-14 (All new papers)
- NEP-FIN-2001-06-14 (Finance)
- NEP-FMK-2001-06-14 (Financial Markets)
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