The Derivation of a New Model of Equity Duration
This 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.
|Date of creation:||May 2001|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.cam.ac.uk/index.htm|
When requesting a correction, please mention this item's handle: RePEc:cam:camdae:0104. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb)
If references are entirely missing, you can add them using this form.