How Non-Gaussian Shocks Affect Risk Premia in Non-Linear DSGE Models

Martin Andreasen

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

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 results in Schmitt-Grohé & Uribe (2004) 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 10-year nominal term premium, whereas a key effect of stochastic volatility and GARCH is an increase in the variability of this premium.

Keywords: Epstain-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)
Pages: 37
Date: 2010-09-10
New Economics Papers: this item is included in nep-dge, nep-ore and nep-upt
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Citations: View citations in EconPapers (1)

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https://repec.econ.au.dk/repec/creates/rp/10/rp10_63.pdf (application/pdf)

Related works:
Working Paper: How non-Gaussian shocks affect risk premia in non-linear DSGE models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2010-63

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