Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79612
Authors: 
Lan, Hong
Meyer-Gohde, Alexander
Year of Publication: 
2013
Series/Report no.: 
SFB 649 Discussion Paper 2013-022
Abstract: 
We analyze the theoretical moments of a nonlinear approximation to a model of business cycles and asset pricing with stochastic volatility and recursive preferences. We find that heteroskedastic 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. Our method decomposes moments into contributions from realized shocks and differing orders of approximation and from shifts in the distribution of future shocks, enabling us to identify the common channel through which stochastic volatility in isolation operates and through which conditional asset pricing measures vary.
Subjects: 
recursive preferences
stochastic volatility
asset pricing
DSGE
moment calculation
JEL: 
C63
E32
G12
Document Type: 
Working Paper

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