New Shocks and Asset Price Volatility in General Equilibrium
IMF Working Papers, May 1, 2011
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Bibliographic details
- Authors: Alessandro Rebucci, Akito Matsumoto, Pietro Cova, Massimiliano Pisani
- Published: May 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455261390.001
Summary and main findings
- Study focus: equity price volatility in general equilibrium with news shocks about future productivity and monetary policy.
- Key contrast: West (1988) shows that in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility.
- Main result: Introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions.
- Mechanism highlighted: In general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks, which can offset the volatility-reducing effect found in partial equilibrium.
- Empirical implication: Neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.
Model and conceptual points
- Model class: canonical dynamic stochastic general equilibrium model with news shocks about future productivity and monetary policy.
- Comparison framework: partial equilibrium present discounted value model (as in West (1988)) versus general equilibrium where endogenous cash flows can change.
Policy and empirical implications
- Empirical estimation risk: Failing to include policy news shocks may bias estimated effects of monetary policy shocks on asset prices.
- Policy relevance: Accounting for news shocks, including policy announcements, is important when interpreting asset price responses to monetary policy.