International R&D Spillovers and Asset Prices

We document that international R&D spillovers through trade in varieties is a major driver of asset prices. We find that country pairs that share more R&D have more correlated stock market returns and less volatile exchange rates. Moreover, we show that countries that depend more heavily on their trading partner's R&D have currencies that tend to pay a positive excess return. We develop an endogenous growth model of innovation and international technology diffusion that rationalizes our empirical findings. A calibrated version of our model matches several important asset pricing and quantity moments, thus alleviating several of the classic quantity-price puzzles of the international macroeconomic literature.