Innovation, Growth, and Asset Pricing

Lukas Schmid and Howard Kung
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Lukas Schmid: Duke University
Howard Kung: Duke University

No 1325, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We examine the asset pricing implications of innovation and R\&D in a stochastic model of endogenous growth. In equilibrium, R\&D endogenously drives a small, persistent component in productivity growth, in line with the data. These productivity dynamics induce long and persistent swings in macro growth rates and asset market valuations at medium and low frequencies. With recursive preferences, households are very averse to such movements in growth rates and command high risk premia in asset markets, helping the model to quantitatively rationalize a variety of asset pricing data. In the model, the resolution of these puzzles is inherently linked to the strong propagation mechanism the model exhibits, absent in standard macroeconomic models. We find strong empirical support for innovation driven low frequency movements in aggregate growth rates and asset market valuations in the data.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1325

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