Cross-Section of Expected Returns Based on Equity Duration

Sungjeh Moon (NH Investments and Securities)
Joonhyuk Song (Hankuk University of Foreign Studies)

Journal of Derivatives and Quantitative Studies: 선물연구

ISSN: 1229-988X

Article publication date: 31 August 2019



We analyze the cross-sectional expected return of KOSPI stocks using equity duration. From 1991 to 2018, we calculate equity durations for the KOSPI listed stocks (including de-listed stocks) and find that the shorter the equity duration, the higher the risk premium. Using the 4-factor model with equity duration added to the benchmark 3-factor model, the explanatory power of the 4-factor model is superior to that of the existing benchmark model in accounting for risk premiums. This is an unusual finding that is not readily explainable by the traditional CAPM or the Fama-French 3-factor model. This can be interpreted that the equity duration is a separate and significant risk factor dissociated from the HML of the 3-factor model.



Moon, S. and Song, J. (2019), "Cross-Section of Expected Returns Based on Equity Duration", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 27 No. 3, pp. 297-327.



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