New Shocks and Asset Price Volatility in General Equilibrium

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

No 2011/110, 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: WP; monetary policy; interest rate; money supply; New shocks; Equity Prices; Productivity; Asset Price; volatility; news shock; equity price; price volatility; monetary policy shock; productivity shock; discount factor; Asset prices; Futures; Stocks; Monetary base (search for similar items in EconPapers)
Pages: 34
Date: 2011-05-01
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Citations: View citations in EconPapers (3)

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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: News Shocks and Asset Price Volatility in General Equilibrium (2011)
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