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Durability of Output and Expected Stock Returns

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Author Info
Joao F. Gomes
Leonid Kogan
Motohiro Yogo

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12986.

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Date of creation: Mar 2007
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Handle: RePEc:nbr:nberwo:12986

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Find related papers by JEL classification:
D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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