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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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