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Creative destruction and asset prices

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  • Grammig, Joachim G.
  • Jank, Stephan

Abstract

This paper introduces Schumpeter's idea of creative destruction into asset pricing. The key point of our model is that small and value firms are more likely destroyed during technological revolutions, resulting into higher expected returns for these stocks. A two-factor model including market return and patent activity growth - the proxy for creative destruction risk - accounts for a large portion of the cross-sectional variation of size and book-to-market sorted portfolios and prices HML and SMB. The expected return difference between assets with the highest and lowest exposure to creative destruction risk amounts to 8.6 percent annually.

Suggested Citation

  • Grammig, Joachim G. & Jank, Stephan, 2010. "Creative destruction and asset prices," CFR Working Papers 10-14, University of Cologne, Centre for Financial Research (CFR).
  • Handle: RePEc:zbw:cfrwps:1014
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    References listed on IDEAS

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    Cited by:

    1. Jank, Stephan, 2015. "Specialized human capital, unemployment risk, and the value premium," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113214, Verein für Socialpolitik / German Economic Association.
    2. Theissen, Erik & Zimmermann, Lukas, 2020. "Do contented customers make shareholders wealthy? Implications of intangibles for security pricing," CFR Working Papers 20-12, University of Cologne, Centre for Financial Research (CFR).
    3. Daniel Andrei & Bruce I. Carlin, 2017. "Asset Pricing in the Quest for the New El Dorado," NBER Working Papers 23455, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    creative destruction; asset pricing; size and value premium; patents;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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