Globalization Risk Premiums and Import Competition in US Equities

Summary

This study examines how exposure to international trade relates to US stock returns. It uses industry transportation costs as a measure of globalization exposure, sorting stocks into portfolios and comparing their excess returns. The reported evidence includes higher average returns in low-transport-cost industries and a return spread that remains after adjusting for standard market, size, and value factors. Results vary with portfolio weighting, and the study notes that differences between large and small firms matter.

A two-country general equilibrium model links the premium to foreign productivity shocks and import competition. The proposed mechanism is that competition can displace less productive domestic firms, while larger firms may offset pressure through exports. The calibration suggests these shocks can coincide with lower US consumption, making exposed firms’ cash flows valuable in bad times and their expected returns higher. The findings depend on the paper’s exposure measure, sample, and model assumptions; they describe a cross-sectional risk premium, not a stand-alone trading rule.

Key ideas

• Industry transportation costs are used to proxy for firms’ exposure to international trade.
• Stocks in low-transport-cost industries show higher average returns in the reported portfolio comparisons.
• The return relationship persists after adjustment for standard market, size, and value factors, though it varies with portfolio weighting.
• The model attributes the premium to import competition displacing less productive firms after foreign productivity shocks.
• Larger firms may partly hedge domestic exposure through exports and access to foreign demand.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.