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Geographic Distribution of Firms and Expected Stock Returns

By introducing a novel exogenous measure, I explore asset pricing and macroeconomic dynamics of tradable goods sector productivity (TSP) shocks. A positive TSP shock reduces consumption in the short run as the economy allocates resources towards exports and investment to raise further productivity. Asset with high sensitivity to the TSP shock have lower returns, on average, given that such assets decrease the volatility of agent's consumption stream. The negative TSP risk premium is statistically and economically significant and survives a number of robustness tests. Also, I provide evidence that TSP risk premium is stronger in larger firms.