Working Paper: NBER ID: w20104
Authors: Jaroslav Borovika; Lars Peter Hansen; José A. Scheinkman
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.
Keywords: shock elasticities; impulse response functions; dynamic economic models; asset pricing
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks (E32) | future variable values (C39) |
| changes in shock exposure (C22) | expected cash flows (G19) |
| changes in shock exposure (C22) | asset prices (G19) |
| shock exposure (Y50) | expected returns (G17) |
| risk exposure (G22) | expected returns (G17) |
| shock-price elasticity (P22) | term structure of risk pricing (G13) |