New Technologies and Stock Returns

Abstract

Investments in emerging technologies, such as quantum computing, are risky. This paper examines whether investing in stocks of companies with high exposure to new technologies leads to potentially high returns. I collect all U.S. patent publications publicized between 1976 and 2021 and their first-and second-hop neighbor patents in their citation network. I use textual information and the information on the citation network to detect tech clusters experiencing high growth of new patents. A size-adjusted value-weighted portfolio is created by buying firms with high exposure to new technology and selling 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 different factor models. In the Fama and MacBeth (1973) regressions of monthly excess returns, the exposure to new technology has a positive, statistically significant loading. I further show that the results are driven by risk-return trade-off.

Keywords: New Technology, Portfolio Analysis

JEL Classification: G11, G12, G14, O32