An Analysis of The Term Structure Of Equity of European Stocks

Abstract

This paper looks at the equity term structure in Europe and its relevance in pricing European stocks using the duration concept. In explaining the cross-sectional variation in the duration premium in Europe, we made use of cash flow duration in understanding the value premium and to check if value and growth stocks have different durations. Empirically, we measure cash flow duration using balance sheet data and show that the different in return is not a manifestation of the value premium. Also relating the time series return to the factor model of Fama and French model which was not able to explain the cross-sectional variation in return. The term structure of equity shows a downward sloping with the measure of cash flow duration at firms level. Surprisingly, factor model could explain only 40% of the return differentials, therefore, the duration premium is not something new in Europe.