IDEAS home Printed from
   My bibliography  Save this paper

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

    Download full text from publisher

    File URL:
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    1. Le Van, Cuong & Morhaim, Lisa, 2002. "Optimal Growth Models with Bounded or Unbounded Returns: A Unifying Approach," Journal of Economic Theory, Elsevier, vol. 105(1), pages 158-187, July.
    2. Bossaerts, Peter & Zame, William R., 2006. "Asset trading volume in infinite-horizon economies with dynamically complete markets and heterogeneous agents: Comment," Finance Research Letters, Elsevier, vol. 3(2), pages 96-101, June.
    3. Emilio Espino & Thomas Hintermaier, 2009. "Asset trading volume in a production economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(2), pages 231-258, May.
    4. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    5. Benhabib, Jess & Rustichini, Aldo, 1994. "A note on a new class of solutions to dynamic programming problems arising in economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 807-813.
    6. Chatterjee, Satyajit, 1994. "Transitional dynamics and the distribution of wealth in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 54(1), pages 97-119, May.
    7. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters,in: The Economics of Information and Uncertainty, pages 1-46 National Bureau of Economic Research, Inc.
    8. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    9. Jermann, Urban J., 2010. "The equity premium implied by production," Journal of Financial Economics, Elsevier, vol. 98(2), pages 279-296, November.
    10. Espino, Emilio, 2007. "Equilibrium portfolios in the neoclassical growth model," Journal of Economic Theory, Elsevier, vol. 137(1), pages 673-687, November.
    11. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
    12. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
    13. Francesc Obiols-Homs & Carlos Urrutia, 2005. "Transitional dynamics and the distribution of assets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(2), pages 381-400, February.
    14. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    15. Alvarez, Fernando & Stokey, Nancy L., 1998. "Dynamic Programming with Homogeneous Functions," Journal of Economic Theory, Elsevier, vol. 82(1), pages 167-189, September.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed006:93. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.