GROWTH OPTIONS AND EQUITY DURATION

The determinants of equity duration, or interest rate sensitivity, hav e proven difficult to identify in empirical studies. The authors argue in this article that because growth opportunities exhibit option-like characteristics, stocks of high-growth companies are likely to react differently to changes in interest rates from stocks of low-growth com panies. They test this hypothesis using two broadly based portfolios a nd find that their high-growth portfolio exhibits significantly differ ent interest rate sensitivity fi om their low-growth portfolio. In fac t, holding market exposure constant, their high-growth portfolio's ret urns react positively to an increase in interest rates, on average, in contrast to the negative reaction of their low-growth portfolio's ret urns.