Innovation-Driven Contractions: A Missing Link for Asset Pricing Puzzles
A new study reveals that technological innovation can trigger short-term economic slowdowns, as companies reduce hiring even while investment in equipment stays steady. These slowdowns are sharper when prices are slow to change, a condition called price stickiness. Using a two-sector New-Keynesian model, the research explains puzzling market trends, like stocks rising on bad labor news. The study also introduces investment-based dividend yields, which predict future stock returns better than traditional measures.
What it examines
This paper studies how technological innovations can cause short-term drops in labor but not capital, and how this explains puzzling patterns in asset prices. Using a two-sector New-Keynesian model with sticky prices, the authors link these innovation-driven contractions to key financial market anomalies.
What it concludes
The results show that innovation-driven contractions help explain asset pricing puzzles and improve predictions of future stock returns. This research can be used to better understand financial markets, guide investment strategies, and improve economic models. Future work may explore effects on bonds, firm differences, and financial frictions.
Evidence objects
New research reveals that technological innovation can trigger short-term economic slowdowns, as companies cut hiring while capital investment remains steadyespecially when prices are slow to adjust, a phenomenon called price stickiness.
key_findings bullet 1 · key_findings · validation V0
Using a two-sector New-Keynesian model with sticky prices, the study explains puzzling financial trends, such as stock returns moving opposite to investment returns and markets reacting positively to negative labor news.
key_findings bullet 2 · key_findings · validation V0
The paper introduces 'investment-based dividend yields,' a novel metric that outperforms traditional measures in predicting future stock returns, offering a unified explanation for how innovation shapes both economic and financial dynamics.
key_findings bullet 3 · key_findings · validation V0
This paper introduces the original concept of 'innovation-driven contractions' to explain asset pricing puzzles, revealing new empirical facts about innovations limited immediate effect on capital and intensified anomalies under price stickiness. Its novel two-sector New-Keynesian model with sticky prices and recursive preferences offers compelling, significant insights for macroeconomics and quantitative finance.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … model strongly predict future returns, underscoring our … This paper offers an integrated solution for such asset-pricing … stock returns and expected investment returns are …
Source row: 1099 · abstract type: snippet