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News shocks and asset price volatility in general equilibrium

Akito Matsumoto, Pietro Cova (), Massimiliano Pisani () and Alessandro Rebucci ()

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 12, 2132-2149

Abstract: We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.

Keywords: News shocks; Equity prices; Productivity; Monetary policy; Asset price volatility (search for similar items in EconPapers)
JEL-codes: E32 F30 F40 G11 (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: News Shocks and Asset Price Volatility in General Equilibrium (2011) Downloads
Working Paper: News Shocks and Asset Price Volatility in General Equilibrium (2011) Downloads
Working Paper: New Shocks and Asset Price Volatility in General Equilibrium (2011) Downloads
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