Examining Macroeconomic Models Through the Lens of Asset Pricing
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
FRB of Chicago Working Paper No. 2012-01
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: 70
Keywords: shock elasticity, pricing, perturbation methods, Markov process, Model Evaluation and Selection, Asset Pricing, Trading volume, Bond Interest Rates, Financial Markets and the Macroeconomy
JEL Classification: C52, G12, E44working papers series
Date posted: December 15, 2011
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