Demand-Driven Risk and the Cross-Section of Expected Returns

34 Pages Posted: 20 Jun 2019 Last revised: 13 Nov 2019

See all articles by Alejandro Lopez-Lira

Alejandro Lopez-Lira

BI Norwegian Business School; University of Pennsylvania - Finance Department; University of Pennsylvania - The Wharton School

Date Written: June 1, 2019

Abstract

Firms that concentrate their activities towards goods with higher income elasticity are more exposed to demand-driven risk since the consumption of high-consumption households is more exposed to aggregate shocks. These firms earn higher risk-adjusted equity returns. A portfolio that goes long on the most exposed firms and short on the least exposed gets an abnormal risk-adjusted annual return of 7.5%. This risk does not seem to be coming from competition. A portfolio that goes long in firms exposed to demand-driven risk and competitive pressure and short on firms not exposed to demand-driven risk nor competitive pressure earns an abnormal risk-adjusted annual return of 14%.

Suggested Citation

Lopez Lira, Alejandro, Demand-Driven Risk and the Cross-Section of Expected Returns (June 1, 2019). Available at SSRN: https://ssrn.com/abstract=3403863 or http://dx.doi.org/10.2139/ssrn.3403863

Alejandro Lopez Lira (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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