45 Pages Posted: 30 Aug 2016 Last revised: 29 Sep 2017
Date Written: September 29, 2017
This study proposes a novel measure of trade induced productivity change and evaluates its implications on equity returns. Trade induced productivity causes high marginal consumption states since, in short-run, resources are re-allocated from consumption towards exports and investment. Assets with high sensitivity to the shock have lower expected returns since their payoffs co-vary negatively with investor's consumption. The risk premium is significantly stronger for high investment firms. I show that the trade induced productivity shock can rationalize the combined cross section of equity, commodity, and corporate bond returns and 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
Suggested Citation: Suggested Citation