EQUITY DURATION PUZZLE AND INVESTORS' DEMANDS: EVIDENCE FROM KOREA

We are interested in to find out how prolonged low interest rate condition since GFC (Global Financial Crisis) has changed the investors' appetite for financial assets. Motivated by Jiang and Sun (2017), this study examines equity duration, the sensitivity of the stock prices to interest rate changes in the Korean market using KOSPI data spanning from 1995 to 2015. We find the following results. First, the equity duration tends to be longer as the dividend yield of stocks increases, which is defined as "Equity Duration Puzzle," contradicting the intuition from the Macaulay duration formula (1938). We found this phenomenon also persist for the 30 chaebol companies which are representative of conservative dividend-paying Korean companies. Second, the equity duration of stocks that pay high dividends statistically decreases as interest rate decline slows. Third, the equity duration puzzle exists even after controlling for the distance to default and the cash flow volatility, implying that these factors cannot explain the puzzle. We conjecture that, under the extended low interest rate conditions, investors' demand shift toward the high dividend stocks may explain this puzzle; we found that when the interest rate decreases, both institutional and individual investors increase the demand for high dividend stocks as the safer substitute of bond. This demand shift can explain the equity duration puzzle in Korean market.