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Contribution Details
Type | Master's Thesis |
Scope | Discipline-based scholarship |
Title | From the implied cost of capital to the equity duration: estimating the sensitivity of equity prices to investors’ required return |
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Institution | University of Zurich |
Faculty | Faculty of Business, Economics and Informatics |
Number of Pages | 43 |
Date | 2022 |
Abstract Text | This study proposes the estimation of the equity duration of the major US equity indices, namely the S&P 500, the Dow, and the NASDAQ 100. Duration for equity assets is measured by the derivative of stocks’ prices to changes of the Implied Cost of capital. The latter is estimated by means of the Residual Income Model (RIM), which is applied to each constituent of the indices. Findings show that the equity duration of the major American indices has risen considerably above its historical average over the 2009-2018 period. Furthermore, by sorting portfolios using duration, there is evidence that equity duration can be effectively used as an alternative measure for the value factor. In addition, a duration-based stock selection strategy outperforms a passive investment in the indices in both absolute and relative terms. Finally, duration measured at the index level is found to predict future indices’ return, especially for the NASDAQ 100. |
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