Shock Elasticities and Impulse Responses
Working Paper 20104
DOI 10.3386/w20104
Issue Date
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.
Published Versions
Jaroslav Borovička & Lars Peter Hansen & José A. Scheinkman, 2014. "Shock elasticities and impulse responses," Mathematics and Financial Economics, vol 8(4), pages 333-354.