Growth options and equity duration

The determinants of equity duration, or interest rate sensitivity, have 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 companies. They test this hypothesis using two broadly based portfolios and find that their high-growth portfolio exhibits significantly different interest rate sensitivity fi om their low-growth portfolio. In fact, holding market exposure constant, their high-growth portfolio's returns react positively to an increase in interest rates, on average, in contrast to the negative reaction of their low-growth portfolio's returns.