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Time-Varying Risk of Disaster, Time-Varying Risk Premia, and Macroeconomic Dynamics
2009
Social Science Research Network
In order to develop a model that ...ts both business cycles and asset pricing facts, this paper introduces a small, time-varying risk of economic disaster in an otherwise standard real business cycle model. This simple feature can generate large and volatile risk premia. Under some conditions, the risk of disaster does not a¤ect the path of macroeconomic aggregates, but in general it does: there is no "separation theorem"between quantities and prices (unlike Tallarini (2000) ). An increase in
doi:10.2139/ssrn.1362331
fatcat:ai36x3rdwfcrvgf5t3knzdb2cy