Risk Price Dynamics
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.
@article{bhhs:2011, 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}, volume={9}, number={1}, pages={3--65}, year={2011}, publisher={Oxford Univ Press} }✕