News Shocks and Asset Price Volatility in General Equilibrium

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

No 4740, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: This paper studies equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1998) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. This paper shows that introducing news shocks in 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 new shocks. In addition, it is shown 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.

JEL-codes: E32 F30 F40 G11 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: News shocks and asset price volatility in general equilibrium (2011)
Working Paper: News Shocks and Asset Price Volatility in General Equilibrium (2011)
Working Paper: New Shocks and Asset Price Volatility in General Equilibrium (2011)
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