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News shocks, nonfundamentalness and volatility

  • Offick, Sven
  • Wohltmann, Hans-Werner

Rational expectations models with news shocks may generate moving average representation that are nonfundamental. The nonfundamentalness typically arises from the lag polynomial associated with news shocks. This paper provides an exact solution formula for this special type of polynomial and discusses its main properties. In the presence of news shocks, the solutions may be used to convert a nonfundamental moving average representation into a fundamental one and vice versa. From the properties of these solutions, we conclude that the destabilizing effects of news shocks are exclusively due to its anticipation characteristic.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165176513000220
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 119 (2013)
Issue (Month): 1 ()
Pages: 17-19

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Handle: RePEc:eee:ecolet:v:119:y:2013:i:1:p:17-19
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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