Technology shocks and stock returns: A long-term perspective

Abstract

Using patent data dating as far back as 1870, we compute local and global technology shocks. United States data reveal strong evidence of in-sample predictability particularly at longer horizons and during economic expansions, principally driven by global technology factors. We also discover strong evidence of time-varying predictability for the United States. We find that the global technology shock is a stronger time-varying predictor of stock returns, predicting returns in as many as 41% of sub-samples of data. Using OECD data for 11 countries, we find evidence of time-varying return predictability for seven countries; however, in-sample and long horizon predictability are, in general, weak. • Historical patent data are used to compute local and global technology shocks. • United States data reveal strong evidence of in-sample predictability. • Predictability is found only at longer horizons and during economic expansions. • Much stronger evidence of time-varying predictability for United States is found. • Seven of the 11 OECD countries reveal strong time-varying return predictability.