The Demographics of Innovation and Asset Returns
We study asset-pricing implications of innovation in a general-equilibrium overlapping-generations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. Due to the lack of inter-generational risk sharing, innovation creates a systematic risk factor, which we call "displacement risk.'' This risk helps explain several empirical patterns, including the existence of the growth-value factor in returns, the value premium, and the high equity premium. We assess the magnitude of displacement risk using estimates of inter-cohort consumption differences across households and find support for the model.
We are grateful for comments and suggestions from Andy Abel, Frederico Belo, Jonathan Berk, George Constantinides, Adlai Fisher, John Heaton, Debbie Lucas, Toby Moskowitz, Marcus Opp, Tano Santos, Nick Souleles, Chris Telmer, Moto Yogo, and seminar participants at the Atlanta Fed, Australian National University, Bond University, Boston University, Chicago Booth, Frontiers of Finance 2008, Georgia State University, Haas, the Jackson Hole Finance Group, London Business School, London School of Economics, Minnesota Macro-Finance 2009, MIT Sloan, NBER AP Meetings, SED 2009, SITE 2009, Stanford GSB, University of Lausanne, University of Melbourne, University of New South Wales, University of Queensland, University of Technology Sidney, UT Austin, WFA 2009, and Wharton. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Displacement Risk and Asset Returns (with Leonid Kogan and Stavros Panageas). Journal of Financial Economics , vol. 105 (2012), issue 3, pp. 491-510. Best Paper Award , Utah Winter Finance Conference 2011.