Innovation, Growth, and Asset Prices

50 Pages Posted: 21 Mar 2011 Last revised: 12 Jun 2014

See all articles by Howard Kung

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Lukas Schmid

Duke University - The Fuqua School of Business

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

Suggested Citation

Kung, Howard and Schmid, Lukas, Innovation, Growth, and Asset Prices (September 2013). AFA 2012 Chicago Meetings Paper. Available at SSRN: or

Howard Kung

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Lukas Schmid (Contact Author)

Duke University - The Fuqua School of Business ( email )

Durham, NC 27708-0120
United States

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