Disruptive Technology, Long-Run Risk, and Asset Prices

Abstract

This paper studies the long-run risk embedded in the news on investment-specific technology (IST), such as the emergence of AI-enhanced robotics, which can substantially change the production environment in the near future. We document that such IST news shock (i) explains a large share of business cycle fluctuations in macro aggregates and (ii) affects stock returns through the channel of expected cash flow growth. Consistent with the long-run consumption risk hypothesis, we find that the IST news shock carries a significantly positive risk premium in the cross section of asset returns and drives firm cash flows over long horizons.

Keywords: news shock, long-run risk, stock returns, technology shock, consumption based asset pricing model

JEL Classification: G10, G12