Title: Second-order approximation of dynamic models with time-varying risk
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.