The Globalization Risk Premium
92 Pages Posted: 29 Mar 2015 Last revised: 11 Jul 2018
Date Written: January 1, 2018
We investigate how globalization is reflected in asset prices. We use shipping costs to measure firms' exposure to globalization. Firms in low shipping cost industries carry a 7 percent risk premium, suggesting that their cash-flows covary negatively with investors' marginal utility. We find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. These findings suggest that foreign productivity shocks are associated with times when consumption is dear for investors. We discuss conditions under which a standard model of trade with asset prices can rationalize this puzzle.
JEL Classification: F11, F4, G14
Suggested Citation: Suggested Citation