Technological Growth and Asset Pricing
University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
University of Minnesota
September 2, 2009
Journal of Finance, Forthcoming
In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: "small", frequent, and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. While the former affect the economy on impact, the latter affect the economy with lags, since firms need to first adopt the new technologies through investment. The process of adoption leads to cycles in asset valuations and risk premia as firms convert the growth options associated with the new technologies into assets in place. This process can help provide a unified, investment-based view of some well documented phenomena such as the asset-valuation patterns around major technological innovations, the countercyclical behavior of returns, the lead-lag relationship between the stock market and output, and the increasing patterns of consumption-return correlations over longer horizons.
Number of Pages in PDF File: 43
Keywords: Production-based asset pricing, continuous-time methods, macro-finance, growth options, irreversible investment, technology adoption, vintage models
JEL Classification: G0, G1, E1, E2
Date posted: December 7, 2006 ; Last revised: May 17, 2012
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