Working Paper: NBER ID: w11876
Authors: Lubos Pastor; Pietro Veronesi
Abstract: We develop a general equilibrium model in which stock prices of innovative firms exhibit "bubbles" during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting "bubbles" in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model's predictions in 1830-1861 and 1992-2005 when the railroad and Internet technologies spread in the United States.
Keywords: Technological revolutions; Stock prices; Bubbles; General equilibrium model
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| new technology (O33) | stock prices (G12) |
| adoption probability (C25) | stock prices (G12) |
| systematic risk (G12) | stock prices (G12) |
| technological uncertainty (O33) | stock price volatility (G17) |
| technological revolutions (O33) | market beta for new economy stocks (G10) |