@techreport{NBERw16633,
title = "Second-Order Approximation of Dynamic Models with Time-Varying Risk",
author = "Gianluca Benigno and Pierpaolo Benigno and Salvatore NisticĂ˛",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "16633",
year = "2010",
month = "December",
doi = {10.3386/w16633},
URL = "http://www.nber.org/papers/w16633",
abstract = {This paper provides first and second-order approximation methods for the solution of non-linear 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 time-varying 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.},
}