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Are asset price data informative about news shocks? A DSGE perspective

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  • Iskrev, Nikolay

Abstract

Standard economic intuition suggests that asset prices are more sensitive to news than other economic aggregates. This has led many researchers to conclude that asset price data would be very useful for the estimation of business cycle models containing news shocks. This paper shows how to formally evaluate the information content of observed variables with respect to unobserved shocks in structural macroeconomic models. The proposed methodology is applied to two different real business cycle models with news shocks. The contribution of asset prices is found to be relatively small. The methodology is general and can be used to measure the informational importance of observables with respect to latent variables in DSGE models. Thus, it provides a framework for systematic treatment of such issues, which are usually discussed in an informal manner in the literature. JEL Classification: C32, C51, C52, E32

Suggested Citation

  • Iskrev, Nikolay, 2018. "Are asset price data informative about news shocks? A DSGE perspective," Working Paper Series 2161, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182161
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    1. Are asset price data informative about news shocks? A DSGE perspective
      by Christian Zimmermann in NEP-DGE blog on 2018-08-22 19:26:17

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    More about this item

    Keywords

    asset prices; DSGE models; identification; information; news shocks;
    All these keywords.

    JEL classification:

    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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