Technological Revolutions and Stock Prices

49 Pages Posted: 24 May 2006 Last revised: 4 Oct 2014

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Pietro Veronesi

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 12, 2008

Abstract

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

Pastor, Lubos and Veronesi, Pietro, Technological Revolutions and Stock Prices (February 12, 2008). CRSP Working Paper No. 606, AFA 2007 Chicago Meetings Paper, EFA 2006 Zurich Meetings, Available at SSRN: https://ssrn.com/abstract=868527 or http://dx.doi.org/10.2139/ssrn.868527

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Pietro Veronesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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