Creative Destruction and Asset Prices

Forthcoming Journal of Financial and Quantitative Analysis

54 Pages Posted: 19 Mar 2011 Last revised: 31 Jan 2015

See all articles by Joachim Grammig

Joachim Grammig

Eberhard Karls Universitaet Tübingen; Centre for Financial Research (CfR); Center for Financial Studies (CfS)

Stephan Jank

Deutsche Bundesbank; University of Cologne - Centre for Financial Research (CFR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2015

Abstract

We relate Schumpeter's notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A two-factor model that accounts for creative destruction risk effectively explains the cross-sectional return variation of size and book-to-market sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.

Keywords: creative destruction, asset prices, size premium, size premium, invention activity

JEL Classification: G10, G12

Suggested Citation

Grammig, Joachim and Jank, Stephan, Creative Destruction and Asset Prices (January 31, 2015). Forthcoming Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=1786944 or http://dx.doi.org/10.2139/ssrn.1786944

Joachim Grammig (Contact Author)

Eberhard Karls Universitaet Tübingen ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.uni-tuebingen.de/uni/wwo/Grammig/grammigeng.html

Centre for Financial Research (CfR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Center for Financial Studies (CfS) ( email )

Taunusanlage 6
Frankfurt/Germany, D-60329
Germany

Stephan Jank

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

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