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Equity Prices, Productivity Growth, And ‘The New Economy’

  • Jakob B Madsen
  • E Philip Davis

The increase in equity prices over the 1990s has to a large degree been attributed to permanently higher productivity growth that is derived from the ‘new economy’ and related research and development (R&D) expenditures. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions,productivity advances can only have temporary effects on fundamentals of equity prices. Using data on R&D capital and fixed capital productivity for 11 OECD countries, the evidence give strong support for the model by suggesting that technology innovations indeed have only temporary effects on equity returns.

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File URL: http://www.brunel.ac.uk/329/efwps/03-04.pdf
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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 03-04.

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Length: 31 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:bru:bruedp:03-04
Contact details of provider: Postal:
Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  1. Jason G. Cummins, 2003. "A New Approach to the Valuation of Intangible Capital," NBER Working Papers 9924, National Bureau of Economic Research, Inc.
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  5. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
  6. Bipasa Datta & Huw D. Dixon, 2002. "Technological Change, Entry and Stock Market Dynamics: An Analysis of Transition in a Monopolistic Economy," CESifo Working Paper Series 641, CESifo Group Munich.
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  8. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
  9. repec:spr:pharme:v:22:y:2004:i:4:p:225-244 is not listed on IDEAS
  10. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
  11. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  12. Carlota Perez, 2002. "Technological Revolutions and Financial Capital," Books, Edward Elgar Publishing, number 2640, April.
  13. Michael T. Kiley, 2000. "Stock prices and fundamentals in a production economy," Finance and Economics Discussion Series 2000-05, Board of Governors of the Federal Reserve System (U.S.).
  14. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  15. Donald Robertson & Stephen Wright, 2006. "Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 91-99, February.
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