How non-Gaussian shocks affect risk premia in non-linear DSGE models

Martin Andreasen

No 417, Bank of England working papers from Bank of England

Abstract: 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 work by Schmitt-Grohe and Uribe 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 ten-year nominal term premium, whereas a key effect of stochastic volatility and GARCH is an increase in the variability of this premium.

Keywords: Epstein-Zin-Weil preferences; GARCH; rare disasters; risk premia; stochastic volatility. (search for similar items in EconPapers)
JEL-codes: C68 E30 E43 E44 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-03-15
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: How Non-Gaussian Shocks Affect Risk Premia in Non-Linear DSGE Models (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0417

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