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Risk premia in general equilibrium

  • Olaf Posch

    ()

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

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.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-58.

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Length: 47
Date of creation: 01 Nov 2009
Date of revision:
Handle: RePEc:aah:create:2009-58
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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