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The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999

The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999 A simple model ( a la Lucas 1978)

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The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999

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  1. The Information-Technology Revolution and the Stock MarketJeremy Greenwood and Boyan JovanicAER 1999

  2. A simple model (a la Lucas 1978) Simple exchange economy: many infinitely lived agents, and equally many “trees”, each tree yielding a “dividend” (output that goes to the owner) of dt at each period t. The (stock market) price of a tree at time zero:

  3. Lucas model – cont. Notice that P0 is also the ratio: stock market value/output (S/GDP) since output=1.

  4. An (expected) tech shock News arrive at t=0 that a fraction x of existing trees will die at date T, and will be replaced by equally many better trees, yielding an output of 1+z. Thus output from T on will be: Output over time is therefore, The new trees will not trade in the stock market until they actually appear at T.

  5. Two types of trees traded in the stock market, before T Type-1 tree – dies at T, liquidation value of zero; before T its price is, Type-2 tree – lives forever. It stock market value:

  6. Type-2 trees Define,

  7. Stock market value before T Recall that, Hence if x goes up, overall market value goes down.

  8. Stock market value: comparative statics (for t<T) • Ptdecreases with x: • more trees are expected to be replaced by trees that are not yet in the market (type 1); • higher x increases consumption in the future, hence lowering U’: alpha down, P2 down. • Pt decreases with z: same as (ii) • Pt increases with T: longer life of present trees, thus their (present) value goes up (recall beta<1, hence if T goes to infinity, max value).

  9. Stock market value afterT At date T new trees pop up and start to be traded. Output per tree, hence also consumption and dividends rise permanently to (1 + xz). Hence,

  10. Stock market to output ratio

  11. Stock Market value relative to GDP

  12. Stock Market Value to GDP Ratio from GPT HT model S falls faster than GDP in phase 1, but starts recovering before phase 2

  13. Actual S/GDP

  14. Comments on S/GDP • Big innovations may at first (and for quite a while) reduce overall Stock Market Value: the appearance of the new GPT means that the old one will soon be obsolete, and these are bad news! • In the GJ model cannot trade in the new “trees” • In HT can trade but the new firms are making zero profits; the old firms have constant profits over the first phase, but their horizon is shrinking!

  15. 1968 Incumbents (“old trees”) vs. all firms “old tree” firms

  16. The rise of Nadaq firms The 1968 incumbents did badly, entrants did very well ~ 20 years later

  17. Winners and Losers in IT IBM, Burroughs, Honeywell, NCR, Sperry Rand, DEC, Data General Apple, Compaq, Dell, Gateway, Microsoft, Novel, Oracle, AOL, Yahoo, etc.

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