Co-movement of skill premium and stock prices

Kausik Gangopadhyay, Atsushi Nishimura () and Rupayan Pal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We examine the empirical phenomenon of co-movement of skill premium and share prices by appealing to the techniques of cointegration. The US data (1984--2010) reveals that stock prices and skill premium are cointegrated indicating a long run relationship. We carry out a further investigation into panel data of six OECD countries (1984--2005). The stock price and the skill premium are found to be cointegrated in this panel data, too. We posit that the co-movement of skill premium and stock prices is driven by unexpected technological progress. Building on a three sector model of endogenous growth through Schumpeterian creative destruction a la Aghion and Howitt (1992, Econometrica: 60(2)), we reconcile these two apparently different ideas in a single model. Our model demonstrates that technological revolution can lead to rise in both skill premium and stock price at the same time. We calibrate our model based on the US data and find that a large part of the change, quantitatively speaking, is explained by our model.

Keywords: Technological revolution; drastic innovation; skill premium; stock prices (search for similar items in EconPapers)
JEL-codes: E24 J31 O33 O41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2012-10
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Working Paper: Co-movement of Skill Premium and Stock Prices (2012)
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