49 Pages Posted: 24 May 2006 Last revised: 4 Oct 2014
Date Written: February 12, 2008
We develop a general equilibrium model in which stock prices of innovative firms exhibit "bubbles" during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting "bubbles" in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model's predictions in 1830-1861 and 1992-2005 when the railroad and Internet technologies spread in the United States.
Keywords: bubble, internet, railroads, technology, innovation, learning, uncertainty
JEL Classification: G1
Suggested Citation: Suggested Citation
Pastor, Lubos and Veronesi, Pietro, Technological Revolutions and Stock Prices (February 12, 2008). CRSP Working Paper No. 606; EFA 2006 Zurich Meetings; AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=868527 or http://dx.doi.org/10.2139/ssrn.868527