Short-Term Stocks, Long-Term Gains : Leveraging Implied Equity Duration in Portfolio Management

Abstract

This thesis extends the literature on equity duration by analyzing stock market dynamics, particularly the short duration premium. Utilizing a robust dataset spanning from 1970 to 2022, our approach extends Weber’s (2018) work through various analytical frameworks, examining this phenomenon in depth. Significant findings include the identification of a short duration premium in the stock market, where stocks with shorter equity duration consistently outperform those with longer durations. This pattern, stable across various market conditions, challenges traditional asset pricing models, indicating a unique value in shorter-duration stocks. This thesis employed various factor models, from the CAPM to the Stambaugh-Yuan model. Each revealed insights but also significant unexplained returns in our SML-portfolio. This highlights the potential influence of market inefficiencies and behavioral aspects in asset pricing, suggesting new directions for future research in this area.