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The Globalization Risk Premium

76 Pages Posted: 29 Mar 2015 Last revised: 25 Mar 2017

Jean-Noel Barrot

Massachusetts Institute of Technology (MIT)

Erik Loualiche

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Julien Sauvagnat

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: March 2017

Abstract

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 8 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

Barrot, Jean-Noel and Loualiche, Erik and Sauvagnat, Julien, The Globalization Risk Premium (March 2017). Paris December 2015 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2586047 or http://dx.doi.org/10.2139/ssrn.2586047

Jean-Noel Barrot

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Erik Loualiche (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Julien Sauvagnat

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

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