Risk Premia in General Equilibrium
Universität Hamburg, Department of Economics; CREATES
July 27, 2010
CESifo Working Paper Series No. 3131
This paper shows that non-linearities imposed by a neoclassical production function alone can generate time-varying and asymmetric risk premia over the business cycle. These (empirical) key features become relevant, and asset market implications improve substantially when we allow for non-normalities in the form of rare disasters. We employ analytical solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. In contrast to endowment economies, the curvature of the policy functions affects the risk premium through controlling the individual’s effective risk aversion.
Number of Pages in PDF File: 47
Keywords: risk premium, continuous-time DSGE
JEL Classification: E21, G12
Date posted: July 28, 2010
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