Mathematics and Financial Economics

, Volume 8, Issue 4, pp 333–354

Shock elasticities and impulse responses

  • Jaroslav Borovička
  • Lars Peter Hansen
  • José A. Scheinkman
Article

DOI: 10.1007/s11579-014-0122-4

Cite this article as:
Borovička, J., Hansen, L.P. & Scheinkman, J.A. Math Finan Econ (2014) 8: 333. doi:10.1007/s11579-014-0122-4

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.

Keywords

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

Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • Jaroslav Borovička
    • 1
  • Lars Peter Hansen
    • 2
    • 3
  • José A. Scheinkman
    • 3
    • 4
    • 5
  1. 1.New York UniversityNew YorkUSA
  2. 2.University of ChicagoChicagoUSA
  3. 3.NBERCambridgeUSA
  4. 4.Columbia UniversityNew YorkUSA
  5. 5.Princeton UniversityPrincetonUSA

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