Risk premia in general equilibrium

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This paper shows that non-linearities from a neoclassical production function alone can generate time-varying, asymmetric risk premia and predictability over the business cycle. These empirical key features become relevant 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 an endowment economy with constant investment opportunities, the curvature of the consumption function affects the risk premium in production economies through controlling the individual's effective risk aversion.
OriginalsprogEngelsk
TidsskriftJournal of Economic Dynamics and Control
Vol/bind35
Nummer9
Sider (fra-til)1557-1576
Antal sider20
ISSN0165-1889
DOI
StatusUdgivet - 2011

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