Becker Friedman Institute

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Risk Price Dynamics

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.

Authors: 
Lars Peter Hansen, The University of Chicago
Jaroslav Borovička, New York University
Mark Hendricks, University of Chicago
José A. Scheinkman, Columbia University
Publication Date: 
January, 2010
Publication Status: 
Document Number: 
2010-004