The Innovation Long-Run Risk Component

Fabio Franceschini

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: This paper provides robust empirical evidence that shocks to aggregate Research and Development (R&D) have persistent effects on macroeconomic dynamics and represent a significant risk for investors, as predicted by the 'long-run risk' literature. The analysis focuses on a single variable, 'effective R&D', which captures the entire contribution of R&D to productivity growth, flexibly accounting for knowledge spillovers and product proliferation effects. Deviations of effective R&D from its equilibrium level can be empirically identified leveraging the error correction term in the cointegration relationship among R&D, total factor productivity, and the labor force. In US data, structural effective R&D shocks affect productivity and consumption growth rates beyond business cycle horizons and are associated with a significant risk premium in a cross section of stock and bond portfolios (around 2% annually), with cash-flow sensitivities proving a key determinant.

JEL-codes: E32 E44 G12 O30 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-cse, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp1215

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