Shock elasticities and impulse responses

Jaroslav Borovička, Lars Peter Hansen, José A. Scheinkman

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We construct shock elasticities that are pricing counterparts to impulse response functions. Recall that impulse response functions measure the importance of next-period shocks for future values of a time series. Shock elasticities measure the contributions to the price and to the expected future cash flow from changes in the exposure to a shock in the next period. They are elasticities because their measurements compute proportionate changes. We show a particularly close link between these objects in environments with Brownian information structures.

    Original languageEnglish (US)
    Pages (from-to)333-354
    Number of pages22
    JournalMathematics and Financial Economics
    Volume8
    Issue number4
    DOIs
    StatePublished - Sep 2014

    Keywords

    • Malliavin derivative
    • Markov dynamics
    • Nonlinear impulse response functions
    • Risk pricing
    • Shock elasticities

    ASJC Scopus subject areas

    • Statistics and Probability
    • Finance
    • Statistics, Probability and Uncertainty

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