Risk Price Dynamics
53 Pages Posted: 26 Jan 2010 Last revised: 24 Apr 2019
There are 3 versions of this paper
Risk Price Dynamics
Risk Price Dynamics
Risk Price Dynamics
Date Written: November 11, 2009
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 macro-economy 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.
Keywords: growth-rate risk, pricing, dynamics, elasticities, Markov process
JEL Classification: C52, E44, G12
Suggested Citation: Suggested Citation
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