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News shocks and asset prices

Malkhozov, Aytek and Tamoni, Andrea (2015) News shocks and asset prices. SRC Discussion Paper (No 34). Systematic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We study the importance of anticipated shocks (news) for understanding the comovement between macroeconomic quantities and asset prices. We find that four-quarter anticipated investment shocks are an important source of fluctuations for macroeconomic variables: they account for about half of the variance in hours and investment. However, it is the four-quarter anticipated productivity shock that is driving a large fraction of consumption and most of the price-dividend ratio fluctuations. These productivity news are key for the model to reproduce the empirical tendency for stock-market valuations and excess returns to lead the business cycle. Importantly, a model that does not use asset price information in the estimation would downplay the role of productivity news; in this case, the model implies that return moves (almost) completely contemporaneously with the economic activity, counterfactually with the data.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk
Additional Information: © 2015 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 19 May 2015 11:18
Last Modified: 08 Jul 2019 23:26
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/62004

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