Innovation Futures, The Nature of Speculation, and Stock Valuations

Abstract

This study provides formal theoretical evidence that, in of itself, and subsequent to the first day of trading, applications of the Gordon Growth Model to pricing of publicly traded equity incorporate informational `noise' and/or `shading of information' that, theoretically, are unbounded. Introduction of pricing of `innovation futures' of publicly traded firms mitigates unboundedness of pricing effects of either of noise or shading of information, for arrival at stock prices that are less prone to extreme swings in value. Pricing of innovation futures of publicly traded firms induces speculation on innovation futures of said firms. The formal theoretical model demonstrates that speculation on innovation futures does not coincide with either of speculation that derives from heterogeneity of information (noise), or speculation that derives from heterogeneity of risk preferences (demand for insurance). In presence of interest for improvement of workings of stock markets, development of models for pricing of innovation futures of publicly traded firms is an important frontier for new research activity.