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Risk shocks with time-varying higher moments

Author

Listed:
  • Dorofeenko Victor

    (Institute of Advanced Studies, Vienna, Austria)

  • Lee Gabriel

    (University of Regensburg, Regensburg, Germany)

  • Salyer Kevin

    (University of Davis, Economics, California, Davis, USA)

  • Strobel Johannes

    (Goethe-Universität Frankfurt am Main, Frankfurt am Main, Germany)

Abstract

Within the context of a financial accelerator model, we model time-varying uncertainty (i.e. risk shocks) through the use of a mixture normal model with time variation in the weights applied to the underlying distributions characterizing entrepreneur productivity. Specifically, we model capital producers (i.e. the entrepreneurs) as either low-risk (a relatively small second moment of productivity) or high-risk (a relatively large second moment of productivity) and the fraction of both types is time-varying. We show that this modeling feature implies that the aggregate distribution of productivity shocks is non-normal and has time varying kurtosis and skewness; both of these features have important effects on equilibrium characteristics. In particular, after estimating the steady-state share and the change in the fraction of risky entrepreneurs, we show that a small change in the fraction of risky types can result in a large quantitative effect of a risk shock relative to standard models for both financial and real variables. Moreover, the bankruptcy rate and the risk premium in the economy are very sensitive to a change in the composition of entrepreneurs.

Suggested Citation

  • Dorofeenko Victor & Lee Gabriel & Salyer Kevin & Strobel Johannes, 2020. "Risk shocks with time-varying higher moments," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(2), pages 1-20, April.
  • Handle: RePEc:bpj:sndecm:v:24:y:2020:i:2:p:20:n:6
    DOI: 10.1515/snde-2018-0028
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    References listed on IDEAS

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    More about this item

    Keywords

    bankruptcy rate; Bayesian analysis; DSGE models; mixture models; time-varying uncertainty;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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