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A New Risk Factor based on Equity Duration

Mohrschladt, Hannes and Nolte, Sven (2018) A New Risk Factor based on Equity Duration. Journal of Banking and Finance, 96 . pp. 126-135. ISSN 0378-4266. http://resolver.caltech.edu/CaltechAUTHORS:20180904-102155776

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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.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1016/j.jbankfin.2018.09.002DOIArticle
ORCID:
AuthorORCID
Nolte, Sven0000-0002-5393-6326
Additional Information:© 2018 Elsevier B.V. Received 15 August 2017, Revised 23 August 2018, Accepted 1 September 2018, Available online 4 September 2018.
Subject Keywords:Duration; Multifactor models; Asset pricing; State variable innovations
Classification Code:JEL classification: G12
Record Number:CaltechAUTHORS:20180904-102155776
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20180904-102155776
Official Citation:Hannes Mohrschladt, Sven Nolte, A new risk factor based on equity duration, Journal of Banking & Finance, Volume 96, 2018, Pages 126-135, ISSN 0378-4266, https://doi.org/10.1016/j.jbankfin.2018.09.002. (http://www.sciencedirect.com/science/article/pii/S0378426618301894)
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:89354
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:04 Sep 2018 17:35
Last Modified:24 Sep 2018 22:42

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