Research Publication

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.

@article{bhs:2014,
  title={Shock Elasticities and Impulse responses},
  author={Borovi{v{c}}ka, Jaroslav and Hansen, Lars Peter and Scheinkman, Jos{'e} A},
  journal={Mathematics and Financial Economics},
  volume={8},
  number={4},
  pages={333--354},
  year={2014},
  publisher={Springer}
}