Second-Order Approximation of Dynamic Models with Time-Varying Risk

Gianluca Benigno, Pierpaolo Benigno and Salvatore Nisticò

FMG Discussion Papers from Financial Markets Group

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 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 alsotime varying.

Date: 2011-03
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.lse.ac.uk/fmg/workingPapers/discussionP ... 2011_SecondOrder.pdf (application/pdf)

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fmg:fmgdps:dp677

Access Statistics for this paper

More papers in FMG Discussion Papers from Financial Markets Group
Bibliographic data for series maintained by The FMG Administration ().