Shock Elasticities and Impulse Responses
30 Pages Posted: 17 Apr 2014 Last revised: 25 Apr 2014
Date Written: April 25, 2014
We construct shock elasticities that are pricing counterparts to impulse response functions. Recall that impulse response functions measure the importance of next-period shocks for future values of a time series. Shock elasticities measure the contributions to the price and to the expected future cash flow from changes in the exposure to a shock in the next period. They are elasticities because their measurements compute proportionate changes. We show a particularly close link between these objects in environments with Brownian information structures.
Keywords: shock elasticities, impulse response functions, risk pricing, Markov dynamics
JEL Classification: C52, C58, E44, G12
Suggested Citation: Suggested Citation