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Implied Equity Duration: A New Measure of Equity Risk

Author

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  • Patricia M. Dechow

    (University of Michigan Business School)

  • Richard G. Sloan

    (University of Michigan Business School)

  • Mark T. Soliman

    (Stanford Graduate School of Business)

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.

Suggested Citation

  • Patricia M. Dechow & Richard G. Sloan & Mark T. Soliman, 2004. "Implied Equity Duration: A New Measure of Equity Risk," Review of Accounting Studies, Springer, vol. 9(2), pages 197-228, June.
    • Handle: RePEc:spr:reaccs:v:9:y:2004:i:2:d:10.1023_b:rast.0000028186.44328.3f
    DOI: 10.1023/B:RAST.0000028186.44328.3f
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    References listed on IDEAS

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    Cited by:

    1. Madhav V. Rajan & Stefan Reichelstein & Mark T. Soliman, 2007. "Conservatism, growth, and return on investment," Review of Accounting Studies, Springer, vol. 12(2), pages 325-370, September.
    2. Panos N. Patatoukas, 2014. "Detecting news in aggregate accounting earnings: implications for stock market valuation," Review of Accounting Studies, Springer, vol. 19(1), pages 134-160, March.
    3. Ryan Samson & Adrian Banner & Luca Candelori & Sebastien Cottrell & Tiziana Di Matteo & Paul Duchnowski & Vahagn Kirakosyan & Jose Marques & Kharen Musaelian & Stefano Pasquali & Ryan Stever & Dario V, 2025. "Supervised Similarity for Firm Linkages," Papers 2506.19856, arXiv.org.
    4. Alessandro Sbuelz, 2025. "Equilibrium asset pricing with short rate risk," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 48(1), pages 93-125, June.
    5. Stephen Penman & Francesco Reggiani, 2013. "Returns to buying earnings and book value: accounting for growth and risk," Review of Accounting Studies, Springer, vol. 18(4), pages 1021-1049, December.

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