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Journal of Financial Economics Vol. 105 No. 3 2012

Displacement risk and asset returns

Nicolae Gârleanu1,2; Leonid Kogan3,4; Stavros Panageas5

1 University of California, Berkeley · 2 Centre for Economic Policy Research · 3 NBER, USA · 4 Sloan School of Management, MIT E62-636, 100 Main Street, Cambridge, MA 02142, USA · 5 University of Chicago

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.

DOI
10.1016/j.jfineco.2012.04.002
Volume
105
Issue
3
Pages
491-510
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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