Asset Pricing in the Quest for the New El Dorado

46 Pages Posted: 30 May 2017

See all articles by Daniel Andrei

Daniel Andrei

McGill University

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 2017

Abstract

Creative destruction not only involves bringing new technology to market, it imposes higher risk on the future of existing assets. We characterize the asset pricing implications of creative destruction when investors compete for market share. Compared to the social optimum, the quest for oligopoly rents leads to over-investment in uncertain projects, spikes in asset prices and risk premia, and an aftermath in which prices fall steeply as uncertainty resolves. These pricing patterns resemble a bubble ex post, but arise solely from competitive behavior and do not require information asymmetry, behavioral biases, or financial frictions. Our analysis yields novel empirical predictions and we discuss how financial innovation might be used to predict bubbles ex ante.

Suggested Citation

Andrei, Daniel and Carlin, Bruce I., Asset Pricing in the Quest for the New El Dorado (May 2017). NBER Working Paper No. w23455. Available at SSRN: https://ssrn.com/abstract=2976195

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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