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The Demographics of Innovation and Asset Returns
Nicolae Garleanu University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) Leonid Kogan Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER) Stavros Panageas University of Chicago Booth School of Business; National Bureau of Economic Research (NBER) October 1, 2009 Abstract: We study asset-pricing implications of innovation in a general-equilibrium overlapping-generations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. Due to the lack of inter-generational risk sharing, innovation creates a systematic risk factor, which we call ``displacement risk.'' This risk helps explain several empirical patterns, including the existence of the growth-value factor in returns, the value premium, and the high equity premium. We assess the magnitude of displacement risk using estimates of inter-cohort consumption differences across households and find support for the model.
Keywords: Asset Pricing, Equity Premium, Value Premium, Intergenerational Risk, Innovation, Displacement Risk JEL Classifications: G12, G1 Working Paper SeriesDate posted: October 22, 2009 ; Last revised: October 22, 2009Suggested CitationContact Information
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