Title

Risk Price Dynamics

Author(s)

Jaroslav Borovicka Jaroslav Borovicka (University of Chicago)

Lars Peter Hansen Lars Hansen (University of Chicago and NBER)

Mark Hendricks Mark Hendricks (University of Chicago)

Jose A. Scheinkman Jose Scheinkman (Princeton University and NBER)

Abstract

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.

Creation Date

2009-11

Section URL ID

ET

Paper Number

wp033_2012_Hansen_Borovicka_Hendricks_Scheinkman_Risk%20Price%20Dynamics.pdf

URL

http://detc.princeton.edu/wp-content/uploads/2016/11/wp033_2012_Hansen_Borovicka_Hendricks_Scheinkman_Risk-Price-Dynamics.pdf

File Function

Jel

C52, E44, G12

Keyword(s)

growth-rate risk, pricing, dynamics, elasticities, Markov process

Suppress

false

Series

10