Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model
37 Pages Posted: 19 Nov 2008 Last revised: 15 Oct 2009
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Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model
Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model
Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model
Date Written: August 1, 2009
Abstract
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 counter-cyclical 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 the risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.
Keywords: Heterogeneous agent, DSGE, Equity premium, Bond premium
JEL Classification: E32, E44, G12
Suggested Citation: Suggested Citation
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