Abstract

http://ssrn.com/abstract=1970441
 
 

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Examining Macroeconomic Models Through the Lens of Asset Pricing


Jaroslav Borovička


New York University (NYU) - Department of Economics

Lars Peter Hansen


University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

December 9, 2011

Becker Friedman Institute for Research in Economics Working Paper No. 2011-012

Abstract:     
Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such shocks. We build on the continuous-time methods developed in Hansen and Scheinkman (2010), Borovicka et al. (2011) and Hansen (2011) by constructing discrete-time shock elasticities that measure the sensitivity of cash flows and their prices to economic shocks including economic shocks featured in the empirical macroeconomics literature. By design, our methods are applicable to economic models that are nonlinear, including models with stochastic volatility. We illustrate our methods by analyzing the asset pricing model of Ai et al. (2010) with tangible and intangible capital.

Number of Pages in PDF File: 65

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Date posted: December 11, 2011 ; Last revised: February 23, 2012

Suggested Citation

Borovička, Jaroslav and Hansen, Lars Peter, Examining Macroeconomic Models Through the Lens of Asset Pricing (December 9, 2011). Becker Friedman Institute for Research in Economics Working Paper No. 2011-012. Available at SSRN: http://ssrn.com/abstract=1970441 or http://dx.doi.org/10.2139/ssrn.1970441

Contact Information

Jaroslav Borovička (Contact Author)
New York University (NYU) - Department of Economics ( email )
19 W 4th Street, 6th floor
New York, NY 10012
United States
Lars Peter Hansen
University of Chicago - Department of Economics ( email )
1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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