Reference : Risk premiums and macroeconomic dynamics in a heterogeneous agent model
Scientific journals : Article
Business & economic sciences : Macroeconomics & monetary economics
Risk premiums and macroeconomic dynamics in a heterogeneous agent model
De Graeve, Ferre [Federal Reserve Bank of Dallas]
Dossche, Maarten [National Bank of Belgium, Research Department]
Emiris, Marina [National Bank of Belgium, Research Department]
Sneessens, Henri mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) > ; Université Catholique de Louvain - UCL > IRES - Institut de recherches économiques et sociales]
Wouters, Raf [National Bank of Belgium, Research Department]
Journal of Economic Dynamics and Control
Elsevier Science
Yes (verified by ORBilu)
[en] Equity Premium ; Bond Premium ; Limited participation ; DSGE
[en] 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 counter-cyclical 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.

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