Technology-Risk-Related Peso Problems in Stock Returns

30 Pages Posted: 29 Jul 2000

Date Written: June 2000

Abstract

In the empirical testing of many asset pricing models it is assumed that realised returns are an unbiased estimate of expected returns over the period of study. In this paper it is argued that the occurrence of negative jumps in a firm's future earnings and, consequently, in its stock price, is positively related to the level of network externalities in the firm's product market. If the ex post frequency of these negative jumps in a sample does not equal the ex ante assessed probability of occurrence, the sample is subject to a peso problem. The hypothesis is tested for by regressing the skewness coefficient of a firm's realised stock return distribution on the firm's R&D intensity, i.e. the ratio of the firm's research and development expenditure to its net sales. The empirical results support the technology-related peso problem hypothesis. In samples subject to such a peso problem, the returns are biased up and the variances are biased down.

Keywords: Asset pricing, peso problem, skewness, technology risk

JEL Classification: G12, G14

Suggested Citation

Penttinen, Aku, Technology-Risk-Related Peso Problems in Stock Returns (June 2000). Available at SSRN: https://ssrn.com/abstract=234548 or http://dx.doi.org/10.2139/ssrn.234548
No contact information is available for Aku Penttinen

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