50 Pages Posted: 30 Jul 2011
Date Written: July 29, 2008
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: consumption-based asset pricing, displacement risk, value premium, equity premium, incomplete markets
JEL Classification: G00, G10, G12, E21, D53
Suggested Citation: Suggested Citation
Garleanu, Nicolae and Kogan, Leonid and Panageas, Stavros, Displacement Risk and Asset Returns (July 29, 2008). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1898711