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Risk premia in general equilibrium

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  • Posch, Olaf

Abstract

This paper shows that non-linearities from a neoclassical production function alone can generate time-varying, asymmetric risk premia and predictability over the business cycle. These empirical key features become relevant when we allow for non-normalities in the form of rare disasters. We employ analytical solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. In contrast to an endowment economy with constant investment opportunities, the curvature of the consumption function affects the risk premium in production economies through controlling the individual's effective risk aversion.

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Bibliographic Info

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

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 1557-1576

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:9:p:1557-1576

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Keywords: Risk premium Continuous-time DSGE Effective risk aversion;

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Cited by:
  1. Michael Funke & Yu-Fu Chen & Aaron Mehrota, 2011. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21105, Hamburg University, Department of Economics.
  2. Olaf Posch & Timo Trimborn, 2011. "Numerical Solution of Dynamic Equilibrium Models under Poisson Uncertainty," CESifo Working Paper Series 3431, CESifo Group Munich.
  3. Posch, Olaf & Trimborn, Timo, 2010. "Numerical solution of continuous-time DSGE models under Poisson uncertainty," Hannover Economic Papers (HEP) dp-450, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Chen, Andrew Y., 2014. "Precautionary Volatility and Asset Prices," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-59, Board of Governors of the Federal Reserve System (U.S.).
  5. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers, Job Market Papers pch1244, Job Market Papers.

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