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Equity Prices, Productivity Growth and 'The New Economy

Author

Listed:
  • Jakob B. Madsen

    (Institute of Economics, University of Copenhagen)

  • E. Philip Davis

    (Department of Economics and Finance, Brunel University)

Abstract

The sharp increase in equity prices over the 1990s was widely attributed to permanently higher productivity growth derived from the New Economy. 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 the fundamentals of equity prices. Using historical data on productivity of R&D capital, patent capital and fixed capital for 11 OECD countries, empirical evidence give strong support for the model by suggesting that technological innovations indeed have only temporary effects on equity returns.

Suggested Citation

  • Jakob B. Madsen & E. Philip Davis, 2004. "Equity Prices, Productivity Growth and 'The New Economy," FRU Working Papers 2004/11, University of Copenhagen. Department of Economics. Finance Research Unit.
    • Handle: RePEc:kud:kuiefr:200411
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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