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Risk premiums and macroeconomic dynamics in a heterogeneous agent model

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  • De Graeve, Ferre
  • Dossche, Maarten
  • Emiris, Marina
  • Sneessens, Henri
  • Wouters, Raf

Abstract

We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents--shareholders, bondholders and workers--that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomic risk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 9 (September)
Pages: 1680-1699

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1680-1699

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Equity Premium Bond Premium Limited participation DSGE;

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Citations

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Cited by:
  1. Ferre De Graeve & Maarten Dossche & Marina Emiris & Henri Sneessens & Raf Wouters, 2008. "Risk premiums and macroeconomic dynamics in a heterogeneous agent model," Working Paper Research 150, National Bank of Belgium.
  2. M. Falagiarda & M. Marzo, 2012. "A DSGE model with Endogenous Term Structure," Working Papers wp830, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Carolina Achury & Sylwia Hubar & Christos Koulovatianos, 2012. "Saving Rates and Portfolio Choice with Subsistence Consumption," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 108-126, January.
  4. Lorenzo Menna & Patrizio Tirelli, 2014. "The Equity Premium in a DSGE Model with Limited Asset Market Participation," Working Papers 275, University of Milano-Bicocca, Department of Economics, revised Jun 2014.
  5. Hans Dewachter & Raf Wouters, 2012. "Endogenous risk in a DSGE model with capital-constrained financial intermediaries," Working Paper Research 235, National Bank of Belgium.
  6. Giorgio Motta & Patrizio Tirelli, 2012. "Income inequality and macroeconomic stability in a New Keynesian model with limited asset market participation," Working Papers 219, University of Milano-Bicocca, Department of Economics, revised Jan 2012.
  7. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2013. "Welfare and bond pricing implications of fiscal stabilization policies," Research Discussion Papers 32/2013, Bank of Finland.
  8. Borenstein, Eliezer & Elkayam, David, 2013. "The equity premium in a small open economy, and an application to Israel," MPRA Paper 43909, University Library of Munich, Germany.

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