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On the Effects of Rare Disasters and Uncertainty Shocks for Risk Premia in Non-Linear DSGE Models

Martin Andreasen

Review of Economic Dynamics, 2012, vol. 15, issue 3, 295-316

Abstract: This paper studies how rare disasters and uncertainty shocks affect risk premia in DSGE models approximated to second and third order. Based on an extension of the results in Schmitt-Grohé & Uribe (2004) to third order, we derive propositions for how rare disasters, stochastic volatility, and GARCH affect any type of risk premia in a wide class of DSGE models. To quantify the effects, we 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 level of the 10-year nominal term premium, whereas a key effect of uncertainty shocks, i.e. stochastic volatility and GARCH, is an increase in the variability of this premium. (Copyright: Elsevier)

Keywords: Epstein-Zin-Weil preferences; GARCH; Rare disasters; Risk premia; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C68 E30 E43 E44 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1016/j.red.2011.08.001

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