Geographic Agglomeration of Firms, Productivity Change, and Asset Prices

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