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Risk-Price Dynamics

  • Jaroslav Borovička
  • Mark Hendricks
  • José A. Scheinkman

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. (JEL: C52, E44, G12) Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 9 (2011)
Issue (Month): 1 (Winter)
Pages: 3-65

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Handle: RePEc:oup:jfinec:v:9:y:2011:i:1:p:3-65
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