Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 236: Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model
Ferre De Graeve (), Maarten Dossche, Marina Emiris, Henri Sneessens and Raf Wouters
Additional contact information
Ferre De Graeve: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Maarten Dossche: National Bank of Belgium, Postal: Research department
Marina Emiris: Bank of Canada, Postal: Research department
Henri Sneessens: University of Luxembourg, Postal: Research department
Raf Wouters: National Bank of Belgium, Postal: Research department
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 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 macroeconomicrisk, 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.
Keywords: Macro-Finance; Heterogeneous agent; Limited participation; Equity premium; Bond premium
44 pages, January 1, 2010
Full text files
wp236.pdf
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