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Endogenous technological progress and the cross section of stock returns

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  • Lin, Xiaoji

Abstract

I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is en- dogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between in- tangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not a¤ect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.

Suggested Citation

  • Lin, Xiaoji, 2009. "Endogenous technological progress and the cross section of stock returns," LSE Research Online Documents on Economics 29047, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:29047
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    More about this item

    Keywords

    Technological Progress; R&D Investment; Physical Investment; Stock Return;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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