De Graeve, Ferre
Dossche, Maarten
Emiris, Marina
Sneessens, Henri
[UCL]
Wouters, Raf
[UCL]
We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents-shareholders, bondholders and workers-that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomic risk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession. (C) 2010 Elsevier B.V. All rights reserved.
Bibliographic reference |
De Graeve, Ferre ; Dossche, Maarten ; Emiris, Marina ; Sneessens, Henri ; Wouters, Raf. Risk premiums and macroeconomic dynamics in a heterogeneous agent model.14th International Conference on Computing in Economics and Finance (CEF 2008) (Univ Sorbonne, Inst Higher Learn, Paris(France), Jun 26-28, 2008). In: Journal of Economic Dynamics and Control, Vol. 34, no. 9, p. 1680-1699 (2010) |
Permanent URL |
http://hdl.handle.net/2078.1/58792 |