State’s regulatory role in implied equity duration of Tehran Stock Exchange

Document Type : Original Article

Authors

1 Assistant professor, Department of Financial Management and Insurance, University of Tehran, Tehran, Iran.

2 Ph.D. Candidate in Financial Engineering, Kish International Campus of the University of Tehran, Kish, Iran.

3 ***Assistant professor, Islamic Azad University, Tehran, Iran.

Abstract

Implied equity duration has been developed in recent years as a risk measure in capital asset pricing models to explain expected returns. Empirical studies indicate a downwards-sloping pattern in the term structure of equity returns; nevertheless, longer duration implies higher expected returns mostly because longer investment horizon is positively associated with more risks. In this research we employ Dechow’s formula to calculate implied equity duration of a sample of firms listed on Tehran stock exchange from 2008 to 2018. The sample is divided into four portfolios sorted in terms of duration. The results indicate a downwards sloping terms structure of equity return. In the literature a number of reasons are proposed to explain this pattern; we refer to the state’s regulation in the pricing of firm’s products or services. According to the results the more regulatory interference in the pricing of firms’ products and services, the higher stock valuation and the less expected returns; thus our proposed investment strategy is to take short position in the stocks with the most price suppression of the products (high duration stocks) and to take long positions in the stocks with the least price suppression of the products (low duration stocks).

Keywords

References

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Financial Management Perspective
Volume 11, Issue 34
September 2021
Pages 9-34

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