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How Non-Gaussian Shocks Affect Risk Premia in Non-Linear DSGE Models

  • Martin M. Andreasen

    ()

    (Bank of England and CREATES)

This paper studies how non-Gaussian 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 risk premia in a wide class of DSGE models. To quantify these effects, we then 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 mean level of the 10-year nominal term premium, whereas a key effect of stochastic volatility and GARCH is an increase in the variability of this premium.

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File URL: ftp://ftp.econ.au.dk/creates/rp/10/rp10_63.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-63.

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Length: 37
Date of creation: 10 Sep 2010
Date of revision:
Handle: RePEc:aah:create:2010-63
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Eric Swanson & Gary Anderson & Andrew Levin, 2006. "Higher-order perturbation solutions to dynamic, discrete-time rational expectations models," Working Paper Series 2006-01, Federal Reserve Bank of San Francisco.
  2. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  3. OndŘej KamenÍk, 2005. "Solving SDGE Models: A New Algorithm for the Sylvester Equation," Computational Economics, Society for Computational Economics, vol. 25(1), pages 167-187, February.
  4. Bianca De Paoli & Alasdair Scott & Olaf Weeken, 2007. "Asset pricing implications of a New Keynesian model," Bank of England working papers 326, Bank of England.
  5. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2010. "New Keynesian Macroeconomics and the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 33-62, 02.
  6. Hördahl, Peter & Tristani, Oreste & Vestin, David, 2007. "The yield curve and macroeconomic dynamics," Working Paper Series 0832, European Central Bank.
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