News Shocks and Asset Price Volatility in General Equilibrium

38 Pages Posted: 15 Aug 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: June 2011

Abstract

This paper studies equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1998) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. This paper shows that introducing news shocks in 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 new shocks. In addition, it is shown 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.

Suggested Citation

Matsumoto, Akito and Cova, Pietro and Pisani, Massimiliano and Rebucci, Alessandro, News Shocks and Asset Price Volatility in General Equilibrium (June 2011). IDB Working Paper No. IDB-WP-252, Available at SSRN: https://ssrn.com/abstract=1909373 or http://dx.doi.org/10.2139/ssrn.1909373

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

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