Second-Order Approximation of Dynamic Models with Time-Varying Risk

Gianluca Benigno, Pierpaolo Benigno and Salvatore Nisticò

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper provides first and second-order approximation methods for the solution of nonlinear 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 timevarying 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.

Keywords: stochastic volatility; second order approximation (search for similar items in EconPapers)
JEL-codes: C63 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-dge and nep-ore
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Citations: View citations in EconPapers (11)

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https://cep.lse.ac.uk/pubs/download/dp1033.pdf (application/pdf)

Related works:
Journal Article: Second-order approximation of dynamic models with time-varying risk (2013)
Working Paper: Second Order Approximation of Dynamic Models with Time-Varying Risk (2011)
Working Paper: Second-order approximation of dynamic models with time-varying risk (2011)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2011)
Working Paper: Second-order approximation of dynamic models with time-varying risk (2010)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2010)
Working Paper: Second-Order Approximation of Dynamic Models with Time-Varying Risk (2010)
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