New Shocks and Asset Price Volatility in General Equilibrium

35 Pages Posted: 20 May 2011

See all articles by Akito Matsumoto

Akito Matsumoto

International Monetary Fund (IMF)

Pietro Cova

Bank of Italy

Massimiliano Pisani

Bank of Italy

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2011

Abstract

We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.

Keywords: Asset prices, Business cycles, Economic models, External shocks, Monetary policy, Productivity, Stock prices

Suggested Citation

Matsumoto, Akito and Cova, Pietro and Pisani, Massimiliano and Rebucci, Alessandro, New Shocks and Asset Price Volatility in General Equilibrium (May 2011). IMF Working Paper No. 11/110, Available at SSRN: https://ssrn.com/abstract=1847343

Akito Matsumoto (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Pietro Cova

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
41
Abstract Views
614
PlumX Metrics