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Displacement risk and asset returns

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  • Gârleanu, Nicolae
  • Kogan, Leonid
  • Panageas, Stavros

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.

Suggested Citation

  • Gârleanu, Nicolae & Kogan, Leonid & Panageas, Stavros, 2012. "Displacement risk and asset returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 491-510.
    • Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:491-510
    DOI: 10.1016/j.jfineco.2012.04.002
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    More about this item

    Keywords

    Consumption-based asset pricing; Displacement risk; Value premium; Equity premium; Incomplete markets;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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