Risk Premia in General Equilibrium

47 Pages Posted: 28 Jul 2010  

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2010

Abstract

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.

Keywords: risk premium, continuous-time DSGE

JEL Classification: E21, G12

Suggested Citation

Posch, Olaf, Risk Premia in General Equilibrium (July 27, 2010). CESifo Working Paper Series No. 3131. Available at SSRN: https://ssrn.com/abstract=1649362

Olaf Posch (Contact Author)

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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