Technological Growth, Asset Pricing, and Consumption Risk

In this paper we develop a theoretical model in order to understand co-movements between asset returns and consumption over short and long horizons. We present an intertemporal general equilibrium model featuring two types of shocks: "small", frequent and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. The latter types of shocks affect the economy with lags, since firms need to invest before they can take advantage of the new technologies. The delayed reaction of consumption to a large technological innovation helps us explain why short run correlations between returns and consumption growth are weaker than their long run counterparts. Because of this effect, the model can shed some light into the economic mechanisms that make consumption based asset pricing more successful at lower frequencies.