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New Shocks and Asset Price Volatility in General Equilibrium

Author/Editor: Matsumoto, Akito | Cova, Pietro | Pisani, Massimiliano | Rebucci, Alessandro
Authorized for Distribution: May 1, 2011
Electronic Access: Free Full Text (PDF file size is 947KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that 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.
 
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Series: Working Paper No. 11/110
Subject(s): Asset prices | Business cycles | Economic models | External shocks | Monetary policy | Productivity | Stock prices
Author's keyword(s): New shocks | Equity Prices | Productivity | Monetary Policy | Asset Price; volatility
 
English  
    Published:   May 1, 2011        
            Format:   Paper
    Stock No:   WPIEA2011110   Pages:   34
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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