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

34 Pages Posted: 24 Jan 2022

See all articles by Alejandro Lopez-Lira

Alejandro Lopez-Lira

University of Florida - Department of Finance, Insurance and Real Estate

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)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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