Innovation, growth and asset prices

Kung, H and Schmid, L (2015) Innovation, growth and asset prices. Journal of Finance, 70 (3). pp. 1001-1037. ISSN 0022-1082

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Abstract

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, Rh&D endogenously drives a small, persistent component in productivity which 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.

Item Type: Article
Additional Information: © 2015 the American Finance Association
Subject Areas: Finance
DOI: 10.1111/jofi.12241
Date Deposited: 02 Mar 2016 18:51
Last Modified: 22 Mar 2016 19:27
URI: http://lbsresearch.london.edu/id/eprint/17

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