52 Pages Posted: 22 Oct 2009 Last revised: 29 Mar 2011
Date Written: February 28, 2011
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 Classification: G12, G1
Suggested Citation: Suggested Citation
Garleanu, Nicolae and Kogan, Leonid and Panageas, Stavros, The Demographics of Innovation and Asset Returns (February 28, 2011). Available at SSRN: https://ssrn.com/abstract=1491046 or http://dx.doi.org/10.2139/ssrn.1491046