Benigno, Gianluca, Benigno, Pierpaolo and Nisticò, Salvatore (2011) Second-order approximation of dynamic models with time-varying risk. Financial Markets Group Discussion Papers (677). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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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.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | https://www.fmg.ac.uk/ |
| Additional Information: | © 2011 The Authors |
| Divisions: | Economics |
| Subjects: | H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance |
| JEL classification: | C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C63 - Computational Techniques |
| Date Deposited: | 29 Jun 2023 14:48 |
| Last Modified: | 16 Sep 2023 00:02 |
| URI: | http://eprints.lse.ac.uk/id/eprint/119071 |
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