Innovation, Growth, and Asset Prices

We examine the asset pricing implications of a production economy whose long-term growth prospects are endogenously determined by innovation and R&D. In equilibrium, R&D endogenously drives a small, persistent component in productivity that generates long-run uncertainty about economic growt...

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Bibliographic Details
Published in:The Journal of finance (New York) 2015-06, Vol.70 (3), p.1001-1037
Main Authors: KUNG, HOWARD, SCHMID, LUKAS
Format: Article
Language:English
Subjects:
Asset management
Asset pricing
Economic equilibrium
Economic growth
Innovation
Pricing policies
R&D
Research & development
Research and development
Securities markets
Studies
Uncertainty
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Summary:We examine the asset pricing implications of a production economy whose long-term growth prospects are endogenously determined by innovation and R&D. In equilibrium, R&D endogenously drives a small, persistent component in productivity that generates long-run uncertainty about economic growth. With recursive preferences, households fear that persistent downturns in economic growth are accompanied by low asset valuations and command high-risk premia in asset markets. Empirically, we find substantial evidence for innovation-driven low-frequency movements in aggregate growth rates and asset market valuations. In short, equilibrium growth is risky.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12241