Risk premia in general equilibrium

Olaf Posch (1)

1 School of Economics and Management

This paper shows that non-linearities from a neoclassical production function alone can generate time-varying, asymmetric risk premia and predictability over the business cycle. These empirical key features become relevant when we allow for non-normalities in the form of rare disasters. We employ analytical solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. In contrast to an endowment economy with constant investment opportunities, the curvature of the consumption function affects the risk premium in production economies through controlling the individual's effective risk aversion.

Mots clés: E21; G12; Risk premium; Continuous-time DSGE; Effective risk aversion

Domaines: Économie et finance quantitative [q-fin]

Olaf Posch. Risk premia in general equilibrium. Journal of Economic Dynamics and Control, 2011, 35 (9), pp.1557. ⟨10.1016/j.jedc.2010.12.017⟩. ⟨hal-00851860⟩