International R&D Spillovers and Asset Prices

We study the international propagation of long-run risk in the context of a general
equilibrium model with endogenous growth. Innovation and international diffusion of
technologies are the channels at the core of our mechanism. A calibrated version of the
model matches several asset pricing and macroeconomic quantity moments, alleviating
some of the puzzles highlighted in the international macro-finance literature. Our model
predicts that country-pairs that share more R&D have less volatile exchange rates
and more correlated stock market returns. Using data from a sample of 19 developed
countries, we provide suggestive empirical evidence in favor of our model’s predictions.