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Term Structure of Risk on Macrofinance Models

Irina Zviadadze

No 965, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: I propose a model-based approach to characterize the term structures of risk in cash flows and asset prices. I relax cross-equation restrictions in structural models and estimate the implied dynamics of macro fundamentals and asset prices. I use shock elasticities to characterize how risk propagates in asset prices. To account for time variation in the risk premium, I extend the theory of dynamic value decomposition (Hansen, 2012) to nonnormal shocks. I find that the leading models of time-varying risk premium fall short to account for the shape and level of the term structure of risk in equity returns and cash flows.

Date: 2017
New Economics Papers: this item is included in nep-rmg
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