I provide an economic model that justifies using bag-of-words, topic modeling, and machine learning techniques to measure firms' risk exposures using the percentage they allocate to each risk in their financial statements. The model provides a theoretical set of sufficient conditions under...

Firms that concentrate their activities towards goods with higher income elasticity are more exposed to demand-driven risk since the consumption of high-consumption households is more exposed to aggregate shocks. These firms earn higher risk-adjusted equity returns. A portfolio that goes long on...