Research and publications

A New Measure of Equity Duration: The Duration-Based Explanation of the Value Premium Revisited

This paper proposes a new methodology to estimate a share's equity duration by using analysts' cash-flow forecasts. It finds that short duration is associated with high expected and realised returns — which cannot be attributed to the shares' systematic risk exposure as implied by the market beta. Instead, the paper shows that this measure of a company's average cash-flow maturity is a priced risk factor that has similar properties as the Fama-French factor B/M ratio. Our analysis suggests that the value premium might be a compensation for the value firms' higher exposure to cash-flow risk.

Author(s):

David Schröder, Florian Esterer

Summary:

This paper proposes a new methodology to estimate a share's equity duration by using analysts' cash-flow forecasts. It finds that short duration is associated with high expected and realised returns — which cannot be attributed to the shares' systematic risk exposure as implied by the market beta. Instead, the paper shows that this measure of a company's average cash-flow maturity is a priced risk factor that has similar properties as the Fama-French factor B/M ratio. Our analysis suggests that the value premium might be a compensation for the value firms' higher exposure to cash-flow risk.

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Type :	Working paper
Date :	11/07/2011
Keywords :	Asset Pricing

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