Working Paper: NBER ID: w15506
Authors: Jaroslav Borovika; Lars Peter Hansen; Mark Hendricks; Jos A. Scheinkman
Abstract: We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.
Keywords: risk price dynamics; asset pricing; shock exposures; investment horizons
JEL Codes: C52; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shock exposures (Y50) | future cash flow growth (D25) |
| shock exposures (Y50) | macroeconomic growth (O11) |
| macroeconomic growth (O11) | future cash flow growth (D25) |
| uncertainty about macroeconomic growth (E66) | welfare implications (I30) |
| uncertainty about macroeconomic growth (E66) | market valuation consequences (G10) |
| shock exposures (Y50) | risk pricing (G13) |
| risk pricing (G13) | welfare outcomes (I38) |