Displacement risk and asset returns

Nicolae Gârleanu, Leonid Kogan and Stavros Panageas

Journal of Financial Economics, 2012, vol. 105, issue 3, 491-510

Abstract: We study asset-pricing implications of innovation in a general-equilibrium overlapping-generations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. Due to the lack of inter-generational risk sharing, innovation creates a systematic risk factor, which we call “displacement risk.” This risk helps explain several empirical patterns, including the existence of the growth-value factor in returns, the value premium, and the high equity premium. We assess the magnitude of displacement risk using estimates of inter-cohort consumption differences across households and find support for the model.

Keywords: Consumption-based asset pricing; Displacement risk; Value premium; Equity premium; Incomplete markets (search for similar items in EconPapers)
JEL-codes: D53 E21 G00 G10 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (50)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:105:y:2012:i:3:p:491-510

DOI: 10.1016/j.jfineco.2012.04.002

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