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On the Effects of Rare Disasters and Uncertainty Shocks for Risk Premia in Non-Linear DSGE Models

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Listed author(s):
  • Martin Andreasen

    (Aarhus University)

Abstract

This paper studies how rare disasters and uncertainty 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 type of risk premia in a wide class of DSGE models. To quantify the effects, we 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 level of the 10-year nominal term premium, whereas a key effect of uncertainty shocks, i.e. stochastic volatility and GARCH, is an increase in the variability of this premium. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2011.08.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 15 (2012)
Issue (Month): 3 (July)
Pages: 295-316

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Handle: RePEc:red:issued:11-84
DOI: 10.1016/j.red.2011.08.001
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Keywords: Epstein-Zin-Weil preferences; GARCH; Rare disasters; Risk premia; Stochastic volatility;

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Find related papers by JEL classification:
  • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
  • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
  • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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