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New goods and asset prices

Paul Scanlon

Journal of Financial Economics, 2019, vol. 132, issue 3, 140-157

Abstract: I extend the consumption capital asset pricing model to incorporate expanding product variety over time and states of nature. In the model, consumers have a love of variety, and consumption consists of different components: product groups and brands. By raising future marginal utility, growth in product groups increases the incentive to save and reduces the risk-free rate. By making marginal utility more volatile, variation in brand and quality growth magnifies consumption risk and raises the equity premium. Embedding new goods in a long-run risk setting has similar implications.

Keywords: Equity premium; Innovation; New product introduction; Risk-free rate (search for similar items in EconPapers)
JEL-codes: E21 E31 E44 G12 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jfinec:v:132:y:2019:i:3:p:140-157