Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099672 | Journal of Economic Dynamics and Control | 2010 | 18 Pages |
Abstract
We investigate the behavior of asset prices in a typical New Keynesian macro model. Using a second-order approximation, we examine bond and equity returns, the equity risk premium, and the behavior of the real and nominal term structure. As documented in the literature, our results suggest that introducing real rigidities to the model increases risk premia. Nevertheless we that find that, in a world dominated by productivity shocks, increasing nominal rigidities reduces risk premia. Such rigidities only enhance risk premia when economic dynamics are mainly driven by monetary policy shocks. The results imply that, unlike in endowment frameworks, matching asset pricing facts in macro models will require attention to the composition of shocks, not just the specification of investor preferences.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Bianca De Paoli, Alasdair Scott, Olaf Weeken,