Equity duration and convexity when firms can fail or stagnate

Shaffer, Sherrill

doi:10.1016/j.frl.2007.07.001

Cited by 10 publications

(7 citation statements)

References 18 publications

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“…This is the main handicap, but not the only one, to get an analytic definition of equity duration. Perhaps because it is not straightforward, in the literature we found some authors who approached this concept through the "stock duration" [12][13][14] that was computed for individual firms later by Leibowitz, first in [15], and then in [16][17][18][19][20][21].…”

Section: Alternative Estimations Of Implied Equity Durationmentioning

confidence: 99%

Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market

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Toscano

2020

Sustainability

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This paper is focused on the measurement of interest rate risk of nonfinancial firms. The measurement is the initial step in the risk management, which, in the context of financial risks, it is expected to lead to better levels of enterprises’ financial sustainability. Concretely, we checked the performance of alternative estimation procedures of the implied equity duration as a measure of the exposure to interest rate risk of firms listed on a small stock market. Previous evidence in the US stock market shows that when the implied equity duration is computed using industry-specific parameters instead of market parameters, significant differences arise in their absolute and relative values and even in their ranking. In this paper, we checked the robustness of these results when we moved to a smaller stock market. To do so, we replicated previous analyses carried out in the Spanish stock market but using alternative estimation procedures. We conclude that significant differences arise in the implied equity duration estimations when we consider industry-specific parameters instead of market parameters. This finding in a small stock market is in line with previous evidence found for the US stock market.

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Section: Alternative Estimations Of Implied Equity Durationmentioning

confidence: 99%

Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market

Fullana

Toscano

2020

Sustainability

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“…Longer terms to reversion will effectively lengthen the duration of property in the same manner as the duration of bonds increases with maturity. 10 As the cash flows associated with a share can respond annually to inflationary changes and reduce the adverse impact of discount rates on its value, equity duration will tend to be shorter than that of a long-term bond (Shaffer, 2007) and a property let on a long lease with non-annual rent reviews.…”

Section: Comparison Of the Sensitivity Of Capital Valuesmentioning

confidence: 99%

The sensitivity of UK commercial property values to interest rate changes

Macgregor

Nanthakumaran

Orr

2012

Journal of Property Research

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Duration and convexity measures are commonly applied in the management of bond portfolios to measure the sensitivity of asset values to changes in interest rates, enabling fund managers to manage their exposure to interest rate risk. Yet, there are no commonly accepted methods for applying the concepts of duration and convexity to equities and real estate, making it difficult for fund managers to analyse the exposure of multi-asset portfolios to interest rate risk (Blitzer & Dash, 2004).This paper contributes to this underdeveloped area of interest rate risk management by assessing the accuracy of using duration and convexity to measure the sensitivity of commercial property values in the UK to discount rate movements. Simulations confirm that property has duration and convexity characteristics similar to bonds. Our estimates overlap with duration figures estimated by Cairns and Wilkie (2010) for index-linked British government bonds over 15 years but are higher than their estimates for conventional bonds and five-to 15-year index-linked gilts. Perhaps more importantly, the paper demonstrates that duration is not sufficiently reliable enough to mitigate the interest rate risk attached to a property portfolio. The inclusion of convexity is necessary for effective interest rate immunisation strategies.

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“…0 is a parameter indexing the size of the payout. Then, as shown in Shaffer (2007), Equation 1 becomes:…”

Section: Effect Of a Liquidation Payoutmentioning

confidence: 99%

“…Recent research has characterized expected discounted cash flow (EDCF) values when firms face a positive probability of failing (Shaffer, 2006(Shaffer, , 2007. That analysis has assumed that the growth rate of cash flows, conditional on survival and the probability of failure are both exogenous parameters.…”

Section: Introductionmentioning

confidence: 99%

Value-neutral tradeoffs between failure risk and growth

Shaffer¹

2008

Applied Financial Economics Letters

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Business choices typically entail tradeoffs between potential growth rates and the risk of failure. This note applies recent results from the theoretical valuation literature to characterize, as a benchmark, the terms of that tradeoff sufficient to leave the expected value of discounted cash flows unchanged. The central result indicates that risk-neutral investors could accept sizeable increases in risk in exchange for modest improvements in expected growth rates. The benchmark result can be used to rank projects in terms of their impact on the value of the firm's equity.

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Equity duration and convexity when firms can fail or stagnate

Cited by 10 publications

References 18 publications

Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market

Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market

The sensitivity of UK commercial property values to interest rate changes

Value-neutral tradeoffs between failure risk and growth

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