Innovation, Growth, and Asset Prices
50 Pages Posted: 21 Mar 2011 Last revised: 12 Jun 2014
Date Written: September 2013
We examine the asset pricing implications of a production economy whose long-term growth prospects are endogenously determined by innovation and R&D. In equilibrium, Rh&D endogenously drives a small, persistent component in productivity which generates long-run uncertainty about economic growth. With recursive preferences, households fear that persistent downturns in economic growth are accompanied by low asset valuations and command high risk premia in asset markets. Empirically, we find substantial evidence for innovation-driven low-frequency movements in aggregate growth rates and asset market valuations. In short, equilibrium growth is risky.
Keywords: Endogenous growth, asset pricing, innovation, R&D, productivity, recursive preferences
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