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Risk Premia in General Equilibrium

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  • Olaf Posch

Abstract

This paper shows that non-linearities imposed by a neoclassical production function alone can generate time-varying and asymmetric risk premia over the business cycle. These (empirical) key features become relevant, and asset market implications improve substantially 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 endowment economies, the curvature of the policy functions affects the risk premium through controlling the individual’s effective risk aversion.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3131.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3131

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Keywords: risk premium; continuous-time DSGE;

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Cited by:
  1. Michael Funke & Yu-Fu Chen, 2010. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21007b, Hamburg University, Department of Economics.
  2. Olaf Posch & Timo Trimborn, 2011. "Numerical Solution of Dynamic Equilibrium Models under Poisson Uncertainty," DEGIT Conference Papers c016_044, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Posch, Olaf & Trimborn, Timo, 2010. "Numerical solution of continuous-time DSGE models under Poisson uncertainty," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-450, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers, Job Market Papers pch1244, Job Market Papers.

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