Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model

37 Pages Posted: 19 Nov 2008 Last revised: 15 Oct 2009

See all articles by Ferre De Graeve

Ferre De Graeve

KU Leuven - Center for Economic Studies

Maarten Dossche

National Bank of Belgium

Marina Emiris

National Bank of Belgium - Research Department

Henri R. Sneessens

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES); IZA Institute of Labor Economics

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 3 versions of this paper

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

De Graeve, Ferre and Dossche, Maarten and Emiris, Marina and Sneessens, Henri and Wouters, Rafael, Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model (August 1, 2009). Available at SSRN: https://ssrn.com/abstract=1303589 or http://dx.doi.org/10.2139/ssrn.1303589

Ferre De Graeve (Contact Author)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Maarten Dossche

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Marina Emiris

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

Henri Sneessens

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium
+ (32) 10 47 39 62 (Phone)
+ (32) 10 47 39 45 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
60
Abstract Views
971
Rank
256,171
PlumX Metrics