Laura Arenas* and Anna María Gil-Lafuente
It is widely asserted that emerging technologies, innovation, and technological disruption lead to increased volatility among stock markets. At first glance, this might appear contradictory since, by definition, novel developments, information technology for example, should surely help to make firm-specific information available on a timelier basis. Starting from the economic theory that defines innovation as long-term, in the light of financial markets shortening investment time horizons to optimize returns and empirical evidence, this article reviews current research on the interplay between emerging technologies, innovation, and volatility. Since risk is commonly used as a proxy for uncertainty, and innovation is an example of true uncertainty, we explore emerging technologies and innovation in the context of return and volatility. We observe that idiosyncratic risk and, indeed, overall risk have increased as a result of emerging technologies. The main drivers of risk in the aforesaid inter play are the use of more complex methods to calculate the fundamental value of assets, over-enthusiasm with regard to innovation fuelling over-expectations that are nourished by herding behavior, asymmetric information and the world economy shifting towards one that is driven by intangible assets. Additionally, some properties of emerging technology and innovation can be defined as diffusive, persistent, heterogeneous, and momentum-oriented, which brings us back to the historical implications of technology bubbles.
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