Abstract
We investigate how globalization is reflected in asset prices. We use shipping costs to measure U.S. firms’ exposure to globalization. We find that firms in low shipping cost industries carry a 7.8 percent risk premium, suggesting that their cash-flows covary negatively with U.S. investors’ marginal utility. To understand the origins of this globalization risk premium, we develop a dynamic general equilibrium model of trade and asset prices. Guided by the model, we find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. These findings suggest that foreign productivity shocks are associated with times where consumption is dear for U.S. investors.
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