Risk-Price Dynamics

Jaroslav Borovička, Mark Hendricks and Jose Scheinkman

Journal of Financial Econometrics, 2011, vol. 9, issue 1, 3-65

Abstract: 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. (JEL: C52, E44, G12) Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2011
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Working Paper: Risk Price Dynamics (2009)
Working Paper: Risk Price Dynamics (2009)
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