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New Shocks and Asset Price Volatility in General Equilibrium
Author:
Mr. Alessandro Rebucci
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Mr. Akito Matsumoto
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Pietro Cova null

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Massimiliano Pisani null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 110
Language:
English
Publication Date:
01 May 2011
DOI:
https://doi.org/10.5089/9781455261390.001
ISBN:
9781455261390
ISSN:
1018-5941
Pages:
34
Keywords:
WP; monetary policy; interest rate; money supply; New shocks; Equity Prices; Productivity; Asset Price; volatility; news shock; equity price; price volatility; monetary policy shock; productivity shock; discount factor; Asset prices; Futures; Stocks; Monetary base
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund