Durability of Output and Expected Stock Returns
63 Pages Posted: 20 Mar 2007 Last revised: 1 Nov 2009
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Durability of Output and Expected Stock Returns
Durability of Output and Expected Stock Returns
Date Written: August 13, 2009
Abstract
The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flows and stock returns of durable-good producers are exposed to higher systematic risk. Using the benchmark input-output accounts of the National Income and Product Accounts, we construct portfolios of durable-good, nondurable-good, and service producers. In the cross-section, an investment strategy that is long on the durable-good portfolio and short on the service portfolio earns a risk premium exceeding 4 percent annually. In the time series, an investment strategy that is long on the durable-good portfolio and short on the market portfolio earns a countercyclical risk premium. We explain these findings in a general equilibrium asset-pricing model with endogenous production.
Keywords: Cash flow, Durable goods, Factor-mimicking portfolio, Input-output accounts, Stock returns
JEL Classification: D57, E21, G12
Suggested Citation: Suggested Citation
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