In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: "small", frequent, and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. While the former affect the economy on impact, the latter affect the economy with lags, since firms need to first adopt the new technologies through investment. The process of adoption leads to cycles in asset valuations and risk premia as firms convert the growth options associated with the new technologies into assets in place. This process can help provide a unified, investment-based view of some well documented phenomena such as the asset-valuation patterns around major technological innovations, the countercyclical behavior of returns, the lead-lag relationship between the stock market and output, and the increasing patterns of consumption-return correlations over longer horizons.
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