Becker Friedman Institute

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Shock Elasticities and Impulse Responses

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.

Authors: 
Jaroslav Borovička, New York University
Lars Peter Hansen, University of Chicago
José A. Scheinkman, Columbia University
Publication Date: 
September, 2014
Publication Type: 
Journal: 
Mathematics and Financial Economics
Volume: 
8
Issue Number: 
4
Pages: 
333-354