New Technologies and Stock Returns

Abstract

This paper examines whether investing in stocks of companies with high exposure to new technologies leads to potentially high returns due to associated uncertainty. I collect all U.S. patent publications from 1976 to 2021 and all patents that cite or are cited by these publications. Using textual information and citation network data, I identify tech clusters experiencing rapid growth in new patents. A size-adjusted value-weighted portfolio is created by buying stocks of firms with high exposure to new technology and selling stocks of firms with low exposure (new-minus-old factor, NMO). The portfolio generates 7.4\% annual returns and 5.7\% to 14.7\% annualized alphas, depending on the factor model used. I further demonstrate that the results are driven by the risk-return trade-off.

Keywords: New Technology, Portfolio Analysis

JEL Classification: G11, G12, G14, O32