Research Publication

September 2014 | Article

Shock Elasticities and Impulse Responses

Jaroslav Borovička, Lars Peter Hansen, Jose A. Scheinkman

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.

Journal: Mathematics and Financial Economics|Volume: 8|Issue Number: 4|Pages: 333-354|Tags: Financial Market Linkages to the Macroeconomy, Uncertainty and Valuation|