Abstract
A productivity shock identified through a VAR is a priced risk factor for one-month industry momentum portfolios and commands a positive risk premium. Stocks in winning industries have higher sensitivity to productivity news, thereby earning higher average returns than do stocks in losing industries. The evidence lends support to an intertemporal capital asset pricing model with human wealth. In many specifications, the exposure to productivity risk captures more than half of the industry momentum profits. This result is encouraging because exposures to Fama–French (1996, 2015) factors and many different ICAPM innovations fail to produce a similar result.
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