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Co-movement of skill premium and stock prices

  • Gangopadhyay, Kausik

    ()

    (Indian Institute of Management, Kozhikode)

  • Nishimura, Atsushi

    ()

  • Pal, Rupayan

    ()

    (Indira Gandhi Institute of Development Research)

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.

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Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2012-024.

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Length: 35 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:ind:igiwpp:2012-024
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  1. Gosling, Amanda & Machin, Stephen & Meghir, Costas, 2000. "The Changing Distribution of Male Wages in the U.K," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 635-66, October.
  2. Boyan Jovanovic & Jeremy Greenwood, 1999. "The Information-Technology Revolution and the Stock Market," American Economic Review, American Economic Association, vol. 89(2), pages 116-122, May.
  3. Berman, E. & Bound, J. & Machin, S., 1997. "Implications of Skill-Biased Technological Change: International Evidence," Papers 25, Centre for Economic Performance & Institute of Economics.
  4. Jakob B Madsen & E Philip Davis, 2003. "Equity Prices, Productivity Growth, And ‘The New Economy’," Economics and Finance Discussion Papers 03-04, Economics and Finance Section, School of Social Sciences, Brunel University.
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  14. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  15. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
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  18. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  19. Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers 2005:11, Lund University, Department of Economics.
  20. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-92, June.
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  22. Robert J. Shiller, 1989. "Comovements in Stock Prices and Comovements in Dividends," NBER Working Papers 2846, National Bureau of Economic Research, Inc.
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