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New Shocks and Asset Price Volatility in General Equilibrium

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

No 11/110, IMF Working Papers from International Monetary Fund

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: Equity prices; Monetary policy; Productivity; New shocks, Asset Price, volatility, news, asset prices, interest rate, International Finance: General, Macroeconomic Aspects of International Trade and Finance: General, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2011-05-01
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Related works:
Journal Article: 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: News Shocks and Asset Price Volatility in General Equilibrium (2011) Downloads
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