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Skewness Risk and Bond Prices

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  • Francisco Ruge-Murcia

Abstract

Statistical evidence is reported that even outside disaster periods, agents face negative consumption skewness, as well as positive inflation skewness. Quantitative implications of skewness risk for nominal loan contracts in a pure exchange economy are derived. Key modeling assumptions are Epstein-Z in preferences for traders and asymmetric distributions for consumption and inflation innovations. The model is solved using a third-order perturbation and estimated by the simulated method of moments. Results show that skewness risk accounts for 6 to 7 percent of the risk premia depending on the bond maturity.

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 17-2012.

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Length: 45 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:mtl:montec:17-2012

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Keywords: Term structure of interest rates; bond premia; nonlinear dynamic models; simulated method of moments;

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Cited by:
  1. Firouzi Naeim, Peyman & Rahimzadeh, golnoush, 2013. "Inflation Skewness and Price Indexation," MPRA Paper 45968, University Library of Munich, Germany.

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