Productivity Gaps and Global Systematic Risk Exposure: Pricing Country-Industry Portfolios

74 Pages Posted: 6 Sep 2020 Last revised: 4 Nov 2020

See all articles by Punit Anand

Punit Anand

McMaster University- Michael G. DeGroote School of Business

Ronald J. Balvers

McMaster University - Michael G. DeGroote School of Business

Date Written: November 3, 2020

Abstract

Shocks transmitted from productivity leaders to lagging economies are systematic sources of risk. Global technology and knowledge diffusion leads to predictable patterns in productivity dynamics across countries and industries. Technology gaps determine the level of exposure to the systematic productivity shocks. Firms in a country-industry with larger technology gaps relative to the world leader are more dependent on the leader’s innovations compared to their own productivity improvements. They thus have higher loadings on the leader productivity shocks and higher average stock returns. For OECD panel data, a country-industry’s technology gap significantly predicts the stock returns of the country-industry: holding the quintile of country-industry portfolios with the largest gaps and shorting the quintile with the smallest gaps generates annual returns of 9.8% (6.7% after risk adjustment with standard factors). A factor representing the technological productivity gap explains country-industry portfolio returns substantially better than standard factor models. Loadings on leader-country productivity shocks have substantial correlation with technology gaps, and leader productivity shocks are more important for stock returns than idiosyncratic productivity shocks. These findings support that the technology gaps and associated higher average returns are indeed linked to systematic risk.

Keywords: Production-Based Asset Pricing, Productivity Gap, Total Factor Productivity, OECD Countries, International Equity Returns, Technology Diffusion

JEL Classification: G12, G15

Suggested Citation

Anand, Punit and Balvers, Ronald J., Productivity Gaps and Global Systematic Risk Exposure: Pricing Country-Industry Portfolios (November 3, 2020). Available at SSRN: https://ssrn.com/abstract=3663430 or http://dx.doi.org/10.2139/ssrn.3663430

Punit Anand

McMaster University- Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario
Canada
9055259140 (Phone)
L8S 4M4 (Fax)

Ronald J. Balvers (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 x23969 (Phone)

HOME PAGE: http://profs.degroote.mcmaster.ca/business/balvers

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