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Product Differentiation and Systematic Risk: Theory and Empirical Evidence

21 Pages Posted: 14 Dec 2011  

Santiago Bazdresch

Banco de México

Date Written: November 13, 2011

Abstract

Firms producing differentiated products have high margins and therefore low risk. As a result firms invest more into developing differentiated products when they perceive risk is high. Higher risk also implies higher product skewness towards more differentiated products and therefore higher average markups. The model predicts endogenous systematic and idiosyncratic riskiness as well as endogenous intensity of competition: firms in high risk industries reduce their riskiness by competing less than firms in low risk industries. Empirical evidence on product differentiation, R\&D expenses, B/M ratios, and market beta is consistent with the model.

Keywords: Stock Returns, Price Differentiation, Product Market Competition, Product Development, Idiosyncratic Volatility, Research and Development, Counter-Cyclical Markups, Price of Risk, Price-Cost Margin, Investment, Innovation

JEL Classification: E32, E22, G12, G32, L11, L16, L25, O31

Suggested Citation

Bazdresch, Santiago, Product Differentiation and Systematic Risk: Theory and Empirical Evidence (November 13, 2011). Available at SSRN: https://ssrn.com/abstract=1971891 or http://dx.doi.org/10.2139/ssrn.1971891

Santiago Bazdresch (Contact Author)

Banco de México

Av. 5 de Mayo No. 18
Col. Centro, Deleg. Cuauhtémoc
Ciudad de México, DF, CDMX 06059
Mexico
+525552372000 (Phone)

HOME PAGE: http://www.banxico.org.mx/

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