Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098629 | Journal of Economic Dynamics and Control | 2013 | 17 Pages |
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Gianluca Benigno, Pierpaolo Benigno, Salvatore Nisticò,