TY  - JOUR
AU  - Benigno,Gianluca
AU  - Benigno,Pierpaolo
AU  - Nisticò,Salvatore
TI  - Second-Order Approximation of Dynamic Models with Time-Varying Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16633
PY  - 2010
Y2  - December 2010
UR  - http://www.nber.org/papers/w16633
L1  - http://www.nber.org/papers/w16633.pdf
N1  - Author contact info:
Gianluca Benigno
London School of Economics
Department of Economics
Houghton Street
London WC2A 2AE ENGLAND
E-Mail: G.Benigno@lse.ac.uk

Pierpaolo Benigno
Dipartimento di Economia e Finanza
Luiss Guido Carli
Viale Romania 32
00197 Rome
ITALY
Tel: 39-0685225-552
E-Mail: pierpaolo.benigno@eief.it

Salvatore Nisticò
Sapienza Università di Roma 
Dipartimento di Scienze Sociali ed Economiche
viale Aldo Moro 5
00185 Rome
Italy
Tel: +39.06.49910690
E-Mail: salvatore.nistico@uniroma1.it
AB  - 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.
ER  -