Second-order approximation of dynamic models with time-varying risk
By: Gianluca Benigno, Pierpaolo Benigno, Salvatore Nisticò
Contributors: Benigno, Pierpaolo; Nisticò, Salvatore; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16633; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16633.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 4/7/2011.

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