New Shocks and Asset Price Volatility in General Equilibrium

By Alessandro Rebucci, Akito Matsumoto, Pietro Cova, Massimiliano Pisani

May 1, 2011

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Alessandro Rebucci, Akito Matsumoto, Pietro Cova, and Massimiliano Pisani. New Shocks and Asset Price Volatility in General Equilibrium, (USA: International Monetary Fund, 2011) accessed November 23, 2024

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.

Subject: Asset prices, Financial institutions, Futures, Monetary base, Money, Prices, Production, Productivity, Stocks

Keywords: Asset Price, Asset prices, Discount factor, Equity price, Equity Prices, Futures, Interest rate, Monetary base, Monetary policy, Monetary policy shock, Money supply, New shocks, News shock, Price volatility, Productivity, Productivity shock, Stocks, Volatility, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/110
Stock No:

WPIEA2011110
ISBN:

9781455261390
ISSN:

1018-5941

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