Local Risk, Local Factors,  and Asset Prices

Tuzel, Selale; Zhang, Miao Ben

doi:10.2139/ssrn.2293784

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Local Risk, Local Factors, and Asset Prices

Journal of Finance, Forthcoming

61 Pages Posted: 15 Jul 2013 Last revised: 28 Aug 2016

See all articles by Selale Tuzel

Selale Tuzel

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Miao Ben Zhang

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: October 16, 2015

Abstract

Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which is part of firm's assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry-adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production-based equilibrium model explains these empirical findings.

Keywords: Industry Composition, Local Factor Prices, Local Beta, Cross Section of Returns

JEL Classification: D24, G12, J21, R30

Suggested Citation: Suggested Citation

Tuzel, Selale and Zhang, Miao Ben, Local Risk, Local Factors, and Asset Prices (October 16, 2015). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2293784 or http://dx.doi.org/10.2139/ssrn.2293784