Geographic Agglomeration of Firms, Productivity Change, and Asset Prices

55 Pages Posted: 30 Aug 2016 Last revised: 3 May 2018

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: April 26, 2018

Abstract

I propose a measure that captures aggregate productivity change associated with firm agglomeration and evaluate its implications on the cross section of asset returns. A positive productivity shock induces a re-allocation of resources from consumption towards exports and investment causing high marginal utility states for the investor. Assets with high sensitivity to the shock have lower expected returns since their payoffs co-vary negatively with consumption. Risk premium is larger among firms with high investment and is dramatically stronger among firms with low profitability. Agglomeration productivity shock is a source of systematic risk subsumed by Fama and French (2015) five-factor model.

Keywords: factor model, asset pricing model, AMD returns, Geographic Agglomeration, Productivity Change

JEL Classification: G12

Suggested Citation

Dissanayake, Ruchith, Geographic Agglomeration of Firms, Productivity Change, and Asset Prices (April 26, 2018). Available at SSRN: https://ssrn.com/abstract=2831046 or http://dx.doi.org/10.2139/ssrn.2831046

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

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