Examining Macroeconomic Models Through the Lens of Asset Pricing

65 Pages Posted: 11 Dec 2011 Last revised: 23 Feb 2012

Jaroslav Borovička

New York University (NYU) - Department of Economics

Lars Peter Hansen

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

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Date Written: December 9, 2011

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.

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: https://ssrn.com/abstract=1970441 or http://dx.doi.org/10.2139/ssrn.1970441

Jaroslav Borovička (Contact Author)

New York University (NYU) - Department of Economics ( email )

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New York, NY 10012
United States

Lars Peter Hansen

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
United States
773-702-8170 (Phone)
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