A New Risk Factor based on Equity Duration

Mohrschladt H, Nolte S


Zusammenfassung
We introduce a new risk factor linking a firms equity duration to investment opportunity risk. Low-duration firms generate short-run cash flows and face strong reinvestment risk. High-duration firms have long-run cash flows and their present value increases when discount rates decrease as a result of a deteriorating investment environment. Our empirical analysis reveals a significant return premium of low-duration stocks, confirming that investors charge a risk premium for stocks with returns that are positively related to the investment environment. Our newly introduced risk factor carries significant risk premiums in cross-sectional asset pricing tests. These premiums are robust to including further risk factors and a variety of different test specifications. Notably, our duration risk factor retains high explanatory power on the cross-section of stock returns in a model including direct measurement of the investment environment via state variable innovations.

Schlüsselwörter
Duration; Multifactor Models; Asset Pricing; State Variable Innovations



Publikationstyp
Forschungsartikel (Zeitschrift)

Begutachtet
Ja

Publikationsstatus
Veröffentlicht

Jahr
2018

Fachzeitschrift
Journal of Banking and Finance

Band
96

Erste Seite
126

Letzte Seite
135

Sprache
Englisch

ISSN
0378-4266

DOI