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

62 Pages Posted: 6 Sep 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: July 29, 2020

Abstract

Productivity shocks transmitted from productivity leaders to trailing sectors are systematic sources of risk. Global technology and knowledge diffusion leads to predictable patterns in productivity dynamics across countries and industries. Productivity gaps determine the level of exposure to the systematic leader productivity shocks. Firms in a country-industry with larger productivity 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 productivity 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 associated with the productivity gap explains country-industry portfolio returns substantially better than standard factor models. Loadings on leader-country-productivity shocks are found to have substantial correlation with productivity gaps, and leader productivity shocks are more important for stock returns than idiosyncratic productivity shocks. These findings suggest that the productivity gaps and associated higher average returns are indeed tied 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 (July 29, 2020). Available at SSRN: https://ssrn.com/abstract=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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