The Demographics of Innovation and Asset Returns

Posted: 17 Aug 2008

See all articles by Nicolae Garleanu

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)

Multiple version iconThere are 3 versions of this paper

Date Written: August 15, 2008

Abstract

We propose a study of an important source of stock market risk, the displacement risk. We focus on the fundamental inequality among firms and consumers with respect to technological innovation. New firms are the primary innovators who increase the overall productivity, but also steal business from older firms. Likewise, skills of younger households are better aligned with new technologies, while the human capital of older agents does not quite keep up with technological progress. Innovation activity increases total output while reducing the share of existing firms' profits in aggregate output. This displacement risk makes households reluctant to own stocks, particularly those of value firms, whose output is relatively exposed to the risk of increased innovation and competition by new firms, while assigning hedging value to growth firms, which profit from innovation. We propose a quantitative general-equilibrium model of displacement risk and offer an intuitive fundamental explanation of several basic empirical asset-pricing facts, including the high value premium, the high equity premium, and the low and stable risk-free rate. Our preliminary calibration results suggest that our model performs well quantitatively. Moreover, our model has unique empirical implications connecting historical returns on value and growth stocks to cross-sectional differences in consumption among households. Preliminary empirical analysis supports these implications of our theory.

Suggested Citation

Garleanu, Nicolae Bogdan and Kogan, Leonid and Panageas, Stavros, The Demographics of Innovation and Asset Returns (August 15, 2008). Available at SSRN: https://ssrn.com/abstract=1230542

Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Leonid Kogan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-636
Cambridge, MA 02142
United States
617-253-2289 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stavros Panageas

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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