Shock elasticities and impulse responses

Jaroslav Borovička; Lars Peter Hansen; José A. Scheinkman

doi:10.1007/s11579-014-0122-4

Shock elasticities and impulse responses

Jaroslav Borovička, Lars Peter Hansen, José A. Scheinkman

Research output: Contribution to journal › Article › peer-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 language	English (US)
Pages (from-to)	333-354
Number of pages	22
Journal	Mathematics and Financial Economics
Volume	8
Issue number	4
DOIs	https://doi.org/10.1007/s11579-014-0122-4
State	Published - 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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10.1007/s11579-014-0122-4

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keywords = "Malliavin derivative, Markov dynamics, Nonlinear impulse response functions, Risk pricing, Shock elasticities",

author = "Jaroslav Borovi{\v c}ka and Hansen, {Lars Peter} and Scheinkman, {Jos{\'e} A.}",

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AU - Scheinkman, José A.

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AB - 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.

KW - Malliavin derivative

KW - Markov dynamics

KW - Nonlinear impulse response functions

KW - Risk pricing

KW - Shock elasticities

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Shock elasticities and impulse responses

Abstract

Keywords

ASJC Scopus subject areas

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