Second-order approximation of dynamic models with time-varying risk

Gianluca Benigno, Pierpaolo Benigno and Salvatore Nisticò

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 7, 1231-1247

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: Solution method; Uncertainty shocks; Risk (search for similar items in EconPapers)
JEL-codes: C63 E37 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
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 (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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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:7:p:1231-1247

DOI: 10.1016/j.jedc.2013.03.007

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