This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally linear model in which risk is still time-varying but has no distinct role – separated from the primitive stochastic disturbances – in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.

Second-Order Approximation of Dynamic Models with Time-Varying Risk / Benigno, Pierpaolo; G., Benigno; S., Nisticò; Nisticò, Salvatore. - In: JOURNAL OF ECONOMIC DYNAMICS & CONTROL. - ISSN 0165-1889. - 37:7(2013), pp. 1231-1247. [http://dx.doi.org/10.1016/j.jedc.2013.03.007]

Second-Order Approximation of Dynamic Models with Time-Varying Risk

BENIGNO, PIERPAOLO;NISTICO', SALVATORE
2013

Abstract

This paper provides first and second-order approximation methods for the solution of non-linear dynamic stochastic models in which the exogenous state variables follow conditionally linear stochastic processes displaying time-varying risk. The first-order approximation is consistent with a conditionally linear model in which risk is still time-varying but has no distinct role – separated from the primitive stochastic disturbances – in influencing the endogenous variables. The second-order approximation of the solution, instead, is sufficient to get this role. Moreover, risk premia, evaluated using only a first-order approximation of the solution, will be also time varying.
2013
Second-Order Approximation of Dynamic Models with Time-Varying Risk / Benigno, Pierpaolo; G., Benigno; S., Nisticò; Nisticò, Salvatore. - In: JOURNAL OF ECONOMIC DYNAMICS & CONTROL. - ISSN 0165-1889. - 37:7(2013), pp. 1231-1247. [http://dx.doi.org/10.1016/j.jedc.2013.03.007]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11385/72263
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