Risk and return on technology stocks and the aggregate stock market
This dissertation investigates the issues related to the risk and return on technology stocks as well as the interpretation of aggregate stock market behavior.
In the first chapter, I study the returns on portfolios sorted by physical investment and R&D expenditure. The issue has recently been actively researched. While some of the studies have focused only on physical investment, others have primarily concentrated their attention on R&D activity and investment in other forms of intangible capital. The present work contributes to the existing literature by simultaneously accounting for both investment dimensions. The main finding is that portfolios of firms combining higher investment in R&D with lower investment in physical capital enjoy higher subsequent returns compared to portfolios with the opposite characteristics. I demonstrate that the spread strategy formed by shorting the equal-weighted “highest physical investment and lowest R&D” portfolio and buying the “lowest physical investment and highest R&D” portfolio yields an average nominal return of about 16% per annum. The observed cross-sectional pattern of returns can be explained by portfolios' exposure to systematic risk. My analysis raises the possibility of the existence of a new, “Investment-R&D spread” factor that is capable of pricing an entire collection of portfolios including those sorted by Investment/R&D, size, book-to-market ratio, and momentum.
The second chapter is based on Bansal, Khatchatrian and Yaron (2002) and provide snew evidence that links asset prices, economic uncertainty and expected growth. It is shown that much of the variation in asset prices can be attributed to fluctuations in economic uncertainty and expected cash-flow growth. In particular, economic uncertainty (measured by conditional volatility of consumption) sharply predicts and is predicted by asset valuation ratios. It is demonstrated that high valuation ratios predict low subsequent economic uncertainty, and that a rise in economic uncertainty leads to a fall in asset prices—that is, financial markets dislike economic uncertainty. It is also shown that there is a strong positive relation between aggregate earnings growth and asset prices, with current price-earnings ratios sharply predicting future earnings growth rates. In addition to observing these phenomena in the US stock market, broadly similar evidence is found in other large economies as well. This empirical evidence is shown to be consistent with the implications of existing parametric general equilibrium models.
Research & development--R&D;
Rates of return;