Risk-price dynamics

Jaroslav Borovička, Lars Peter Hansen, Mark Hendricks, José A. Scheinkman

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Article numbernbq030
    Pages (from-to)3-65
    Number of pages63
    JournalJournal of Financial Econometrics
    Volume9
    Issue number1
    DOIs
    StatePublished - Jan 1 2011

      Fingerprint

    Keywords

    • Dynamics
    • Elasticities
    • Growth-rate risk
    • Markov process
    • Pricing

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

    Cite this

    Borovička, J., Hansen, L. P., Hendricks, M., & Scheinkman, J. A. (2011). Risk-price dynamics. Journal of Financial Econometrics, 9(1), 3-65. [nbq030]. https://doi.org/10.1093/jjfinec/nbq030