Technological Revolutions and Stock Prices

Lubos Pastor, Pietro Veronesi

NBER Working Paper No. 11876
Issued in December 2005
NBER Program(s):   AP

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.

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Published: Pastor, Lubos and Pietro Veronesi. "Technological Revolutions and Stock Prices." American Economic Review 99, 4 (2009): 1451-1483.

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An online appendix is available for this publication.

This paper was revised on February 13, 2008

Acknowledgments

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