News shocks and asset prices

Aytek Malkhozov and Andrea Tamoni

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: anticipated shocks; sources of aggregate fluctuations; Bayesian estimation; DSGE model (search for similar items in EconPapers)
JEL-codes: C22 E32 E44 G12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-03-20
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:62004

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