Research Publication

January 2011 | Article

Risk Price Dynamics

Lars Peter Hansen, Jaroslav Borovička, Mark Hendricks, José A. Scheinkman

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.

This paper was originally presented as the Journal of Financial Econometrics Lecture at the June 2009 SoFiE conference.

Journal: Journal of Financial Econometrics|Volume: 9|Issue Number: 1|Pages: 3-65|Tags: Uncertainty and Valuation|Export BibTeX >
  title={Risk-Price Dynamics},
  author={Borovi{v{c}}ka, Jaroslav and Hansen, Lars Peter and Hendricks, Mark and Scheinkman, Jos{'e} A},
  journal={Journal of Financial Econometrics},
  publisher={Oxford Univ Press}