Advanced Search
MyIDEAS: Login

Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model

Contents:

Author Info

  • De Graeve, Ferre

    ()
    (Research Department, Central Bank of Sweden)

  • Dossche, Maarten

    (National Bank of Belgium)

  • Emiris, Marina

    (Bank of Canada)

  • Sneessens, Henri

    (University of Luxembourg)

  • Wouters, Raf

    (National Bank of Belgium)

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 macroeconomicrisk, 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.riksbank.com/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/2010/wp236.pdf
Our checks indicate that this address may not be valid because: 404 Not Found (http://www.riksbank.com/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/2010/wp236.pdf [301 Moved Permanently]--> http://www.riksbank.se/en/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/2010/wp236.pdf). If this is indeed the case, please notify (Lena Löfgren)
Download Restriction: no

Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 236.

as in new window
Length: 44 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:hhs:rbnkwp:0236

Contact details of provider:
Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Email:
Web page: http://www.riksbank.com/
More information through EDIRC

Related research

Keywords: Macro-Finance; Heterogeneous agent; Limited participation; Equity premium; Bond premium;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  2. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
  3. Ferre de Graeve & Maarten Dossche & Marina Emiris & Henri Sneessens & Raf Wouters, 2009. "Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model," CREA Discussion Paper Series 09-17, Center for Research in Economic Analysis, University of Luxembourg.
  4. Luis M. Viceira & Adi Sunderam & John Y. Campbell, 2008. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," 2008 Meeting Papers 355, Society for Economic Dynamics.
  5. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
  6. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Research 143, National Bank of Belgium.
  7. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers 5877, C.E.P.R. Discussion Papers.
  8. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  9. Söderlind, Paul, 2009. "The C-CAPM without ex post data," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 721-729, December.
  10. Harald Uhlig, 2007. "Explaining Asset Prices with External Habits and Wage Rigidities in a DSGE Model," SFB 649 Discussion Papers SFB649DP2007-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  11. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
  12. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  13. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2006. "Macroeconomic implications of changes in the term premium," Working Paper Series 2006-46, Federal Reserve Bank of San Francisco.
  14. Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
  15. 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.
  16. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. Yili Chien & Harold Cole & Hanno Lustig, 2011. "A Multiplier Approach to Understanding the Macro Implications of Household Finance," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 199-234.
  18. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
  19. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
  20. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  21. Martin Lettau & Harald Uhlig, 2000. "Can Habit Formation be Reconciled with Business Cycle Facts?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 79-99, January.
  22. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  23. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. Dewachter, Hans & Wouters, Raf, 2014. "Endogenous risk in a DSGE model with capital-constrained financial intermediaries," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 241-268.
  3. De Graeve, Ferre & Dossche, Maarten & Emiris, Marina & Sneessens, Henri & Wouters, Raf, 2010. "Risk premiums and macroeconomic dynamics in a heterogeneous agent model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1680-1699, September.
  4. 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.
  5. 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.
  6. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2013. "Welfare and bond pricing implications of fiscal stabilization policies," Research Discussion Papers 32/2013, Bank of Finland.
  7. M. Falagiarda & M. Marzo, 2012. "A DSGE model with Endogenous Term Structure," Working Papers wp830, Dipartimento Scienze Economiche, Universita' di Bologna.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:rbnkwp:0236. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lena Löfgren).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.