Equity Duration : Theoretical and Practical Analysis

Duration is an important parameter used by investors to choose between different investment opportunities in financial economics. While the concept of duration is usually associated with fixed-income assets, its expansion to the equity assets is becoming more relevant in the recent period, due to extraordinary measures by central banks. The Quantitative Easing and other related programs are relevant to risk-free rates and, consequently, discount factors and expected returns. The article aims to provide a first complete overview of Equity Duration, calculating and comparing different types, investigating the changes in prices and equity values, and identifying whether there is a relationship between duration fluctuations and enterprise values. The models are applied to the dataset covering roughly 30 years of data until 2021. The analysed equity indexes belong to the US market; four of them refer to the general US market, while the others refer to the first-level and second-level sectors, with the price of S&P500 used as the benchmark for beta computation in the CAPM discount factor formula. The analysis uses several methods to calculate the duration between 21/12/2007 and 01/10/2021, each one aiming to find the most accurate and consistent. The first method is the benchmark for the subsequent computations and uses the dividend discount model; the second method uses the discounted cash flow model over four years; the last one implements an H-Model to the discounted cash flow over nine years. Finally, we analyse the relationship between debt and duration fluctuations: data show a close relationship which could help investors’ decisions in asset allocation