Trade Induced Productivity Change and Asset Prices

Abstract

This study proposes a novel measure of trade induced productivity change and assesses its implications on macroeconomic dynamics and equity returns. Trade induced productivity leads to low consumption states since, in the short-run, resources are reallocated from consumption towards exports and investment. The decrease in terms-of-trade exacerbates the short-term effects on consumption. Assets with high sensitivity to the shock have lower expected returns since their payoffs co-vary negatively with investor's consumption. I show that the negative premium is stronger among high investment firms. Risk premium associated with the shock is robust to the inclusion of a multitude of other factors.

Keywords: factor model, asset pricing model, TMN returns, Trade Induced Productivity Change

JEL Classification: G12, F14, F65