Equity Duration

Duration is traditionally used to measure the exposure to interest rate risk of a fixed income portfolio and the contribution of the individual components to its overall risk. Although the duration of a financial instrument undoubtedly represents an indispensable parameter for the quantification and management of financial risk, the attempt to extend the concept of duration to equities has proven very complex and has often been a source of confusion. However, given the importance of this parameter in financial immunization, risk management, tactical asset allocation, and since it could be a relevant factor even in estimating the opportunity cost of capital, equity duration certainly cannot be set aside. In this chapter, the main equity duration models and the most relevant empirical results reported in academic literature are illustrated in detail. In addition, given its high importance in the equity duration literature, the so-called equity duration paradox is discussed.