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News shocks and asset price volatility in general equilibrium

Listed author(s):
  • Matsumoto, Akito
  • Cova, Pietro
  • Pisani, Massimiliano
  • Rebucci, Alessandro

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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 2132-2149

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2132-2149
DOI: 10.1016/j.jedc.2011.08.004
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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