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Technological Growth, Asset Pricing, and Consumption Risk over Long Horizons


  • Stavros Panageas

    () (Finance The Wharton School - Univ. of Penn.)

  • Jianfeng Yu


In this paper we develop a theoretical model in order to understand comovements between asset returns and consumption over longer horizons. We develop an intertemporal general equilibrium model featuring two types of shocks: small, frequent and disembodied shocks to productivity and large technological innovations, which are embodied into new vintages of the capital stock. The latter type of shocks affect the economy with significant lags, since firms need to make irreversible investments in the new types of capital and there is an option value to waiting. The model produces endogenous cycles, countercyclical variation in risk premia, and only a very modest degree of predictability in consumption and dividend growth as observed in the data. In the model, the conventional consumption CAPM holds conditionally. Yet, by conditioning down we show that its resulting unconditional version takes a form that resembles closely the version of the CAPM used in the literature on eventual or long run risk, and most closely Juliard and Parker (2005). We then use the model as a laboratory to show that in our simulated data the unconditional consumption CAPM performs badly, while its long-horizon version performs significantly better.

Suggested Citation

  • Stavros Panageas & Jianfeng Yu, 2006. "Technological Growth, Asset Pricing, and Consumption Risk over Long Horizons," 2006 Meeting Papers 93, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:93

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    Cited by:

    1. Hanno Lustig, "undated". "Exploring the Link between Housing and the Value Premium (joint with Stijn Van Nieuwerburgh)," UCLA Economics Online Papers 389, UCLA Department of Economics.
    2. Iulian Obreja & Chris Telmer, 2008. "Accounting for Low Frequency Variation in Tobin's q," 2008 Meeting Papers 815, Society for Economic Dynamics.
    3. Hengjie Ai & Mariano Massimiliano Croce & Kai Li, 2013. "Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 491-530.
    4. Hengjie Ai & Dana Kiku, 2008. "A Model of Cross-Section of Equity Returns and Firm Dynamics," 2008 Meeting Papers 1030, Society for Economic Dynamics.

    More about this item


    Continuous Time Asset Pricing; Long Horizons; Technology; Growth Options; Consumption CAPM;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production


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