New Technologies and Stock Returns

Abstract

This paper documents high returns from stocks of companies exposed to new technologies, attributing this to uncertainty in future cash flows. I identify new technology patent publications each year using a graph-neural network model. The exposure of firms to new tech is computed based on their recent patent publications. A portfolio contrasting high- and low-new tech exposures yields a 0.6% monthly return and 0.47%-1.15% alphas. The high returns involve substantial risk premiums required by risk-averse investors. New tech exposure positively correlates with idiosyncratic volatility. The findings illuminate the positive relationship between idiosyncratic risk and stock returns.

Keywords: New Technology, Portfolio Analysis, Uncertainty and Expected Stock Returns, Idiosyncratic Volatility

JEL Classification: G11, G12, G14, O32