A New Risk Factor based on Equity Duration
- Creators
- Mohrschladt, Hannes
- Nolte, Sven
Abstract
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.
Additional Information
© 2018 Elsevier B.V. Received 15 August 2017, Revised 23 August 2018, Accepted 1 September 2018, Available online 4 September 2018.Attached Files
Supplemental Material - 1-s2.0-S0378426618301894-mmc1.pdf
Files
Name | Size | Download all |
---|---|---|
md5:fdf82ceba7ea2b60d20e0e4ff55a0cea
|
175.6 kB | Preview Download |
Additional details
- Eprint ID
- 89354
- Resolver ID
- CaltechAUTHORS:20180904-102155776
- Created
-
2018-09-04Created from EPrint's datestamp field
- Updated
-
2021-11-16Created from EPrint's last_modified field