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How Non-Gaussian Shocks Affect Risk Premia in Non-Linear DSGE Models

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  • Martin M. Andreasen

    ()
    (Bank of England and CREATES)

Abstract

This paper studies how non-Gaussian shocks affect risk premia in DSGE models approximated to second and third order. Based on an extension of the results in Schmitt-Grohé & Uribe (2004) to third order, we derive propositions for how rare disasters, stochastic volatility, and GARCH affect any risk premia in a wide class of DSGE models. To quantify these effects, we then set up a standard New Keynesian DSGE model where total factor productivity includes rare disasters, stochastic volatility, and GARCH. We ?find that rare disasters increase the mean level of the 10-year nominal term premium, whereas a key effect of stochastic volatility and GARCH is an increase in the variability of this premium.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-63.

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Length: 37
Date of creation: 10 Sep 2010
Date of revision:
Handle: RePEc:aah:create:2010-63

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Epstain-Zin-Weil preferences; GARCH; rare disasters; risk premia; stochastic volatility.;

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References

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  1. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  2. Seonghoon Cho & Antonio Moreno & Geert Bekaert, 2005. "New-Keynesian Macroeconomics and the Term Structure," Faculty Working Papers 04/05, School of Economics and Business Administration, University of Navarra.
  3. Ondrej Kamenik, 2005. "Solving SDGE Models: A New Algorithm for the Sylvester Equation," Working Papers 2005/10, Czech National Bank, Research Department.
  4. Bianca De Paoli & Alasdair Scott & Olaf Weeken, 2007. "Asset pricing implications of a New Keynesian model," Bank of England working papers 326, Bank of England.
  5. Eric Swanson & Gary Anderson & Andrew Levin, 2006. "Higher-order perturbation solutions to dynamic, discrete-time rational expectations models," Working Paper Series 2006-01, Federal Reserve Bank of San Francisco.
  6. Peter Hördahl & Oreste Tristani & David Vestin, 2008. "The Yield Curve and Macroeconomic Dynamics," Economic Journal, Royal Economic Society, vol. 118(533), pages 1937-1970, November.
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Cited by:
  1. Hatcher, Michael, 2011. "Time-varying volatility, precautionary saving and monetary policy," Bank of England working papers 440, Bank of England.
  2. Gianluca Benigno & Pierpaolo Benigno & Salvatore Nisticò, 2010. "Second-Order Approximation of Dynamic Models with Time-Varying Risk," NBER Working Papers 16633, National Bureau of Economic Research, Inc.
  3. Andreasen, Martin, 2011. "An estimated DSGE model: explaining variation in term premia," Bank of England working papers 441, Bank of England.
  4. Hakon Tretvoll, 2012. "Real exchange rate variability in a two country business cycle model," 2012 Meeting Papers 911, Society for Economic Dynamics.

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