Fabio Franceschini

This paper provides robust empirical evidence that shocks to aggregate Research and Development (R&D) have persistent effects on macroeconomic dynamics and represent a significant risk for investors, as predicted by the "long-run risk" literature. The analysis focuses on a single variable, "effective R&D", which captures the entire contribution of R&D to productivity growth, flexibly accounting for knowledge spillovers and product proliferation effects. Deviations of effective R&D from its equilibrium level can be empirically identified leveraging the error correction term in the cointegration relationship among R&D, total factor productivity, and the labor force. In US data, structural effective R&D shocks affect productivity and consumption growth rates beyond business cycle horizons and are associated with a significant risk premium in a cross section of stock and bond portfolios (around 2% annually), with cash-flow sensitivities proving a key determinant.

CAPM is known to empirically underestimate expected returns of low-risk assets and overestimate those with high risk. This paper studies how risks omission and funding tightness jointly contribute to explaining this anomaly, with the former affecting the definition of assets' riskiness and the latter affecting how risk is remunerated. Theoretically, the two effects are shown to counteract each other. Empirically, the spread related to binding leverage constraints is found to be significant at 2% yearly. Nonetheless, average returns of portfolios that exploit this anomaly are found to mostly reflect omitted risks, contrasting how they have been used in previous analysis.

When sustainability of assets is appreciated, its effect on the discount rates does not depend on the sustainability of the asset priced only, but it is intrinsically mediated by the risk profile of the asset itself. This has significant implications for the measurement of the actual spreads associated to sustainability concerns in financial markets as well as for hedging changes in the sustainability concerns. Specifically, (1) average returns of long-short portfolios of assets sorted on sustainability can be totally unrelated to the priced spread and (2) the effectiveness of assets in hedging changes to the sustainability concerns will depend on assets' "sustainability intensity" and their risk jointly. The main implications are tested on a ESG score measure for US stocks, revealing, in fact, a detachment between the average excess return of a high-minus-low ESG portfolio and the measured ESG spread.