Durability of Output and Expected Stock Returns

João F. Gomes (), Leonid Kogan and Motohiro Yogo ()

No 12986, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D57 E21 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-rmg
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