Second Order Approximation of Dynamic Models with Time-Varying Risk

Pierpaolo Benigno, Gianluca Benigno and Salvatore Nisticò

No 8177, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally-linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally-linear model in which risk is still time-varying but has no distinct role - separated from the primitive stochastic disturbances- in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.

Keywords: Second order approximation; stochastic volatility; Uncertainty (search for similar items in EconPapers)
JEL-codes: C63 (search for similar items in EconPapers)
Date: 2011-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Second-order approximation of dynamic models with time-varying risk (2013)
Working Paper: Second-order approximation of dynamic models with time-varying risk (2011)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2011)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2010)
Working Paper: Second-order approximation of dynamic models with time-varying risk (2010)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2010)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2010)
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