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News Shocks and Asset Prices

33 Pages Posted: 14 Dec 2013 Last revised: 10 Mar 2015

Aytek Malkhozov

Board of Governors of the Federal Reserve System

Andrea Tamoni

London School of Economics & Political Science (LSE)

Date Written: March 9, 2015

Abstract

We study the importance of anticipated shocks (news) for understanding the comovement between macroeconomic quantities and asset prices. We nd that four-quarter anticipated investment shocks are an important source of fluctuations for macroeconomic variables: they account for about half of the variance in hours and investment. However, it is the four-quarter anticipated productivity shock that is driving a large fraction of consumption and most of the price-dividend ratio fluctuations. These productivity news are key for the model to reproduce the empirical tendency for stock-market valuations and excess returns to lead the business cycle. Importantly, a model that does not use asset price information in the estimation would downplay the role of productivity news; in this case, the model implies that return moves (almost) completely contemporaneously with the economic activity, counterfactually with the data.

Keywords: Anticipated shocks, sources of aggregate fluctuations, Bayesian estimation, DSGE model.

JEL Classification: C22, E32, E44, G12, G17

Suggested Citation

Malkhozov, Aytek and Tamoni, Andrea, News Shocks and Asset Prices (March 9, 2015). Available at SSRN: https://ssrn.com/abstract=2367196 or http://dx.doi.org/10.2139/ssrn.2367196

Aytek Malkhozov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrea Tamoni (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
02079557303 (Phone)

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