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

Value premium and implied equity duration in the Japanese stock market

“…Brennan and Xia (2006), Lettau and Wachter (2007), Da (2009) propose theoretical models where equity duration affects the risk premium. In addition, Dechow, Sloan and Soliman (2004) and Schröder and Esterer (2012) find evidence for the theoretical implication. However, existing studies have not compared the performance of the Fama-French HM L risk factor with the factor related to the equity duration.…”

“…Moreover, they find that the risk factor related to duration subsumes the HM L risk factor in the excess market return. Schröder and Esterer (2012) present a convenient method of computing a share's equity duration and find evidence that their equity durations have similar properties to the book-to-market ratio in the excess stock returns.…”

“…First, to compare the performances of three asset pricing models, we adopt the stochastic discount factor approach and employ the following three tests: the overidentifying test of the generalized methods of moments (GMM) estimation proposed by Hansen (1982); the Hansen-Jagannathan bounds for the stochastic discount factor by Hansen and Jagannathan (1991); and the Hansen-Jagannathan distance by Hansen and Jagannathan (1997). Because Dechow, Sloan and Soliman (2004), and Schröder and Esterer (2012), do not use the stochastic discount factor approach, they do not examine whether the stochastic discount factor including the duration-risk-factor prices stock returns or not. We are also able to compare the performance of the three asset pricing models by using the HansenJagannathan distance.…”