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Durability of Output and Expected Stock Returns

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  • Jo�o F. Gomes
  • Leonid Kogan
  • Motohiro Yogo

Abstract

The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flows and stock returns of durable‐good producers are exposed to higher systematic risk. Using the benchmark input‐output accounts of the National Income and Product Accounts, we construct portfolios of durable‐good, nondurable‐good, and service producers. In the cross section, an investment strategy that is long on the durable‐good portfolio and short on the service portfolio earns a risk premium exceeding 4 percent annually. In the time series, an investment strategy that is long on the durable‐good portfolio and short on the market portfolio earns a countercyclical risk premium. We explain these findings in a general equilibrium asset‐pricing model with endogenous production.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 117 (2009)
Issue (Month): 5 ()
Pages: 941 - 986

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Handle: RePEc:ucp:jpolec:doi:10.1086/648882

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Citations

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Cited by:
  1. Jennie Bai, 2010. "Equity premium predictions with adaptive macro indexes," Staff Reports 475, Federal Reserve Bank of New York.
  2. International Monetary Fund, 2011. "Business Cycles in Emerging Markets," IMF Working Papers 11/133, International Monetary Fund.
  3. Yang, Wei, 2011. "Long-run risk in durable consumption," Journal of Financial Economics, Elsevier, vol. 102(1), pages 45-61, October.
  4. Jones, Christopher S. & Tuzel, Selale, 2013. "Inventory investment and the cost of capital," Journal of Financial Economics, Elsevier, vol. 107(3), pages 557-579.
  5. Belo, Frederico, 2010. "Production-based measures of risk for asset pricing," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 146-163, March.
  6. Ren, Yu & Yuan, Yufei & Zhang, Yang, 2014. "Human capital, household capital and asset returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 11-22.
  7. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
  8. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2013. "The Value of Corporate Culture," EIEF Working Papers Series 1327, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2013.
  9. Leonid Kogan & Dimitris Papanikolaou, 2012. "Growth Opportunities, Technology Shocks, and Asset Prices," NBER Working Papers 17795, National Bureau of Economic Research, Inc.
  10. William B. English & Skander J. Van den Heuvel & Egon Zakrajsek, 2012. "Interest rate risk and bank equity valuations," Finance and Economics Discussion Series 2012-26, Board of Governors of the Federal Reserve System (U.S.).
  11. Belo, Frederico & Gala, Vito D. & Li, Jun, 2013. "Government spending, political cycles, and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(2), pages 305-324.
  12. Kim, H. Youn, 2014. "International financial integration and risk sharing among countries: A production-based approach," Journal of the Japanese and International Economies, Elsevier, vol. 31(C), pages 16-35.
  13. Álvarez-Parra, Fernando & Brandao-Marques, Luis & Toledo, Manuel, 2013. "Durable goods, financial frictions, and business cycles in emerging economies," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 720-736.
  14. Miguel Palacios, 2010. "Human Capital as an Asset Class: Implications from a General Equilibrium Model," Working Papers 2011-016, Human Capital and Economic Opportunity Working Group.
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  16. Hafedh Bouakez & Badye Omar Essid & Michel Normandin, 2010. "Stock Returns and Monetary Policy: Are There Any Ties ?," Cahiers de recherche 1026, CIRPEE.
  17. Yang, Fan, 2013. "Investment shocks and the commodity basis spread," Journal of Financial Economics, Elsevier, vol. 110(1), pages 164-184.

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