Shock elasticities and impulse responses |
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Authors: | Jaroslav Borovička Lars Peter Hansen José A Scheinkman |
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Institution: | 1. New York University, New York, USA 2. University of Chicago, Chicago, USA 3. NBER, Cambridge, USA 4. Columbia University, New York, USA 5. Princeton University, Princeton, USA
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Abstract: | We construct shock elasticities that are pricing counterparts to impulse response functions. Recall that impulse response functions measure the importance of next-period shocks for future values of a time series. Shock elasticities measure the contributions to the price and to the expected future cash flow from changes in the exposure to a shock in the next period. They are elasticities because their measurements compute proportionate changes. We show a particularly close link between these objects in environments with Brownian information structures. |
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