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Displacement risk and asset returns

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  • Gârleanu, Nicolae
  • Kogan, Leonid
  • Panageas, Stavros
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    Abstract

    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 105 (2012)
    Issue (Month): 3 ()
    Pages: 491-510

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    Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:491-510

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Consumption-based asset pricing; Displacement risk; Value premium; Equity premium; Incomplete markets;

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    Cited by:
    1. Grammig, Joachim & Jank, Stephan, 2013. "Creative destruction and asset prices," University of Tuebingen Working Papers in Economics and Finance 61, University of Tuebingen, Faculty of Economics and Social Sciences.
    2. Hirshleifer, David & Hsu, Po-Hsuan & Li, Dongmei, 2013. "Innovative efficiency and stock returns," Journal of Financial Economics, Elsevier, vol. 107(3), pages 632-654.
    3. Jerry Tsai & Jessica A. Wachter, 2014. "Rare Booms and Disasters in a Multi-sector Endowment Economy," NBER Working Papers 20062, National Bureau of Economic Research, Inc.
    4. Leonid Kogan & Dimitris Papanikolaou & Noah Stoffman, 2013. "Technological Innovation: Winners and Losers," NBER Working Papers 18671, National Bureau of Economic Research, Inc.
    5. Sylvain, Serginio, 2014. "Does Human Capital Risk Explain The Value Premium Puzzle?," MPRA Paper 54551, University Library of Munich, Germany.

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