The equity 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 incomes assets, its expansion to the equity assets is becoming more relevant in the recent period, with the increase of risk-free rates and the consequent rising discount factors. The thesis aims to calculate and compare different types of equity duration, investigate the changes in prices and equity values, and identify whether it exists a relationship between duration fluctuations and enterprise values in equity indexes. The dataset covers roughly 30 years of data up to the end of 2021. Provided by Bloomberg analysts, it includes weekly last prices, best long-term growth for the earning per share, best calculated free cash flows, and 10-year and 30-year US risk-free rates. Goldman Sachs provided the equity risk premium. The analysed equity indexes belong to the US market, four of them refers to the general us market while the others 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 flows model over four years; and the last one implements an H-Model to the discounted cash flows over nine years. The last chapters analyse the relationship between debt and duration fluctuations and present a new method to compute the duration in continuous time. The results suggest that each subsequent model starting from the simpler improves the duration calculus, by distinguishing between high-duration and low-duration indexes and sectors. Furthermore, data show a relation between debt and duration fluctuations, which could help investors' decisions in asset allocation.
The equity 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 incomes assets, its expansion to the equity assets is becoming more relevant in the recent period, with the increase of risk-free rates and the consequent rising discount factors. The thesis aims to calculate and compare different types of equity duration, investigate the changes in prices and equity values, and identify whether it exists a relationship between duration fluctuations and enterprise values in equity indexes. The dataset covers roughly 30 years of data up to the end of 2021. Provided by Bloomberg analysts, it includes weekly last prices, best long-term growth for the earning per share, best calculated free cash flows, and 10-year and 30-year US risk-free rates. Goldman Sachs provided the equity risk premium. The analysed equity indexes belong to the US market, four of them refers to the general us market while the others 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 flows model over four years; and the last one implements an H-Model to the discounted cash flows over nine years. The last chapters analyse the relationship between debt and duration fluctuations and present a new method to compute the duration in continuous time. The results suggest that each subsequent model starting from the simpler improves the duration calculus, by distinguishing between high-duration and low-duration indexes and sectors. Furthermore, data show a relation between debt and duration fluctuations, which could help investors' decisions in asset allocation.
Equity Duration: A Comprehensive Theoretical and Practical Analysis
BIANCHI, LUCA
2020/2021
Abstract
The equity 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 incomes assets, its expansion to the equity assets is becoming more relevant in the recent period, with the increase of risk-free rates and the consequent rising discount factors. The thesis aims to calculate and compare different types of equity duration, investigate the changes in prices and equity values, and identify whether it exists a relationship between duration fluctuations and enterprise values in equity indexes. The dataset covers roughly 30 years of data up to the end of 2021. Provided by Bloomberg analysts, it includes weekly last prices, best long-term growth for the earning per share, best calculated free cash flows, and 10-year and 30-year US risk-free rates. Goldman Sachs provided the equity risk premium. The analysed equity indexes belong to the US market, four of them refers to the general us market while the others 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 flows model over four years; and the last one implements an H-Model to the discounted cash flows over nine years. The last chapters analyse the relationship between debt and duration fluctuations and present a new method to compute the duration in continuous time. The results suggest that each subsequent model starting from the simpler improves the duration calculus, by distinguishing between high-duration and low-duration indexes and sectors. Furthermore, data show a relation between debt and duration fluctuations, which could help investors' decisions in asset allocation.È consentito all'utente scaricare e condividere i documenti disponibili a testo pieno in UNITESI UNIPV nel rispetto della licenza Creative Commons del tipo CC BY NC ND.
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https://hdl.handle.net/20.500.14239/1818