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Risk premia in general equilibrium

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  • Olaf Posch

    (Aarhus University, School of Economics and Management and CREATES)

Abstract

This paper shows that non-linearities 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 explicit 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. We find that the curvature of the policy functions affects the risk premium through controlling the individual's effective risk aversion.

Suggested Citation

  • Olaf Posch, 2009. "Risk premia in general equilibrium," CREATES Research Papers 2009-58, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2009-58
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    Cited by:

    1. Posch, Olaf & Trimborn, Timo, 2013. "Numerical solution of dynamic equilibrium models under Poisson uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2602-2622.
    2. Chen, Yu-Fu & Funke, Michael, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," SIRE Discussion Papers 2010-48, Scottish Institute for Research in Economics (SIRE).
    3. Juan Carlos Parra‐Alvarez & Olaf Posch & Andreas Schrimpf, 2022. "Peso problems in the estimation of the C‐CAPM," Quantitative Economics, Econometric Society, vol. 13(1), pages 259-313, January.
    4. Christensen, Bent Jesper & Posch, Olaf & van der Wel, Michel, 2016. "Estimating dynamic equilibrium models using mixed frequency macro and financial data," Journal of Econometrics, Elsevier, vol. 194(1), pages 116-137.
    5. Olaf Posch & Timo Trimborn, 2010. "Numerical solution of continuous-time DSGE models under Poisson uncertainty," Economics Working Papers 2010-08, Department of Economics and Business Economics, Aarhus University.
    6. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.
    7. Olaf Posch, 2018. "Resurrecting the New-Keynesian Model: (Un)conventional Policy and the Taylor Rule," CESifo Working Paper Series 6925, CESifo.
    8. Andrew Y. Chen, 2014. "Precautionary Volatility and Asset Prices," Finance and Economics Discussion Series 2014-59, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Risk premium; Continuous-time DSGE; Optimal stochastic control;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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