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Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model

  • Ferre de Graeve
  • Maarten Dossche
  • Marina Emiris
  • Henri Sneessens
  • Raf Wouters

    ()

    (CREA, University of Luxembourg)

We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in attitude towards risk and intertemporal sub- stitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combi- nation of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and counter- cyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical la- bor share. Based on the empirical estimates for the two sources of real macroeconomic risk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.

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File URL: http://wwwen.uni.lu/content/download/24333/294825/file/2009-17_Risk%20Premiums%20and%20Macroeconomic%20Dynamics%20in%20a%20Heterogeneous%20Agent%20Model.pdf
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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 09-17.

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Date of creation: 2009
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Handle: RePEc:luc:wpaper:09-17
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