Creative Destruction and Asset Prices. (29th December 2016)

• Record Type: Journal Article
• Authors: Grammig, Joachim; Jank, Stephan
• Is Part Of: Journal of financial and quantitative analysis. Volume 51:Number 6(2016)
• Page Start: 1739
• Page End: 1768
• Publication Date: 2016-12-29
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109016000557
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract : We relate Schumpeter's notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A 2-factor model that accounts for creative-destruction risk effectively explains the cross-sectional return variation of size- and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.