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.
Titolo: | Second-Order Approximation of Dynamic Models with Time-Varying Risk |
Autori: | |
Data di pubblicazione: | 2013 |
Rivista: | |
Handle: | http://hdl.handle.net/11385/72263 |
Appare nelle tipologie: | 01.1 - Articolo su rivista (Article) |