  This paper explores asset pricing implications of unemployment risk from
sectoral shifts. I proxy for this risk using cross-industry dispersion (CID),
defined as a mean absolute deviation of returns of 49 industry portfolios. CID
peaks during periods of accelerated sectoral reallocation and heightened
uncertainty. I find that expected stock returns are related cross-sectionally
to the sensitivities of returns to innovations in CID. Annualized returns of
the stocks with high sensitivity to CID are 5.9% lower than the returns of the
stocks with low sensitivity. Abnormal returns with respect to the best factor
model are 3.5%, suggesting that common factors can not explain this return
spread. Stocks with high sensitivity to CID are likely to be the stocks, which
benefited from sectoral shifts. CID positively predicts unemployment through
its long-term component, consistent with the hypothesis that CID is a proxy for
unemployment risk from sectoral shifts.
