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Skewness Risk and Bond Prices

  • Francisco Ruge-Murcia
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    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-Z in 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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    Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 17-2012.

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    Length: 45 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:mtl:montec:17-2012
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