Working Paper: NBER ID: w12986
Authors: Joao 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.
Keywords: Durable Goods; Expected Stock Returns; Systematic Risk
JEL Codes: D57; E21; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Durability of output (L15) | Systematic risk (G40) |
| Cash flows of durable goods producers (L68) | Cash flow volatility (G19) |
| Cash flow volatility (G19) | Expected returns (G17) |
| Durable expenditure-stock ratio (E20) | Cash flow volatility (G19) |
| Cash flows of durable goods producers (L68) | Correlation with aggregate consumption (E20) |
| Investment strategy on durable goods (G31) | Average annual return (G17) |
| Cash flows of durable goods producers (L68) | Countercyclical expected returns (E32) |
| Durability of output (L15) | Cash flow volatility (G19) |
| Durability of output (L15) | Expected stock returns (G17) |