Risk Price Dynamics
Journal of Financial Econometrics, Forthcoming
67 Pages Posted: 23 May 2019
Date Written: July 13, 2010
We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.
Keywords: growth-rate risk, pricing, dynamics, elasticities, Markov process
JEL Classification: C52, E44, G12
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