Konferenzbeitrag

Decomposing Risk in Dynamic Stochastic General Equilibrium

We analyze the theoretical moments of a nonlinear approximation to real business cycle model with stochastic volatility and recursive preferences. We nd that the conditional heteroskedasticity of stochastic volatility operationalizes a time-varying risk adjustment channel that induces variability in conditional asset pricing measures and assigns a substantial portion of the variance of macroeconomic variables to variations in precautionary behavior, both while leaving its ability to match key macroeconomic and asset pricing facts untouched. We calculate the theoretical moments directly and decomposes these moments into contributions from shifts in the distribution of future shocks (i.e., risk) and from realized shocks and differing orders of approximation, enabling us to identify the common channel through which stochastic volatility in isolation operates and through which conditional asset pricing measures vary over time. Under frictional investment and varying capital utilization, output drops in response to an increase in risk, but the contributions to the variance of macroeconomic variables from risk becomes negligible.

Language
Englisch

Bibliographic citation
Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Dynamic Macro Models ; No. E10-V2

Classification
Wirtschaft
Computational Techniques; Simulation Modeling
Business Fluctuations; Cycles
Asset Pricing; Trading Volume; Bond Interest Rates

Event
Geistige Schöpfung
(who)
Lan, Hong
Meyer-Gohde, Alexander
Event
Veröffentlichung
(who)
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
(where)
Kiel und Hamburg
(when)
2014

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Konferenzbeitrag

Associated

  • Lan, Hong
  • Meyer-Gohde, Alexander
  • ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft

Time of origin

  • 2014

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