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Term Structure of Uncertainty in the Macroeconomy

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  • Borovicka, J.
  • Hansen, L.P.

Abstract

Dynamic economic models make predictions about impulse responses that characterize how macroeconomic processes respond to alternative shocks over different horizons. From the perspective of asset pricing, impulse responses quantify the exposure of macroeconomic processes and other cash flows to macroeconomic shocks. Financial markets provide compensations to investors who are exposed to these shocks. Adopting an asset pricing vantage point, we describe and apply methods for computing exposures to macroeconomic shocks and the implied compensations represented as elasticities over alternative payoff horizons. The outcome is a term structure of macroeconomic uncertainty.

Suggested Citation

  • Borovicka, J. & Hansen, L.P., 2016. "Term Structure of Uncertainty in the Macroeconomy," Handbook of Macroeconomics, Elsevier.
  • Handle: RePEc:eee:macchp:v2-1641
    DOI: 10.1016/bs.hesmac.2016.06.005
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    Cited by:

    1. Likuan Qin & Vadim Linetsky, 2016. "The Long Bond, Long Forward Measure and Long-Term Factorization in Heath-Jarrow-Morton Models," Papers 1610.00818, arXiv.org, revised Jul 2017.

    More about this item

    Keywords

    Asset pricing; Impulse response functions; Shock elasticities; Financing frictions; Martingales; C10; C32; C58; E44; G12; G32;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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