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Skewness Risk and Bond Prices

  • RUGE-MURCIA, Francisco J.

Statistical evidence is reported that even outside disaster periods, agents face negative consumption skewness, as well as positive inflation skewness. Quantitative implications of skewness risk for nominal loan contracts in a pure exchange economy are derived. Key modeling assumptions are Epstein-Zin preferences for traders and asymmetric distributions for consumption and inflation innovations. The model is solved using a third-order perturbation and estimated by the simulated method of moments. Results show that skewness risk accounts for 6 to 7 percent of the risk premia depending on the bond maturity.

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File URL: https://papyrus.bib.umontreal.ca/xmlui/handle/1866/8860
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2012-14.

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Length: 42 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:mtl:montde:2012-14
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