Please use this identifier to cite or link to this item:
Lan, Hong
Meyer-Gohde, Alexander
Year of Publication: 
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Dynamic Macro Models E10-V2
We analyze the theoretical moments of a nonlinear approximation to real business cycle model with stochastic volatility and recursive preferences. We nd that the conditional heteroskedasticity of stochastic volatility operationalizes a time-varying risk adjustment channel that induces variability in conditional asset pricing measures and assigns a substantial portion of the variance of macroeconomic variables to variations in precautionary behavior, both while leaving its ability to match key macroeconomic and asset pricing facts untouched. We calculate the theoretical moments directly and decomposes these moments into contributions from shifts in the distribution of future shocks (i.e., risk) and from realized shocks and differing orders of approximation, enabling us to identify the common channel through which stochastic volatility in isolation operates and through which conditional asset pricing measures vary over time. Under frictional investment and varying capital utilization, output drops in response to an increase in risk, but the contributions to the variance of macroeconomic variables from risk becomes negligible.
Document Type: 
Conference Paper

Files in This Item:

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.