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A1206
Topic: Contributions on the estimation of DSGE models Title: Stochastic volatility for asset pricing and business cycles Authors:  Oliver de Groot - University of St Andrews (United Kingdom) [presenting]
Abstract: A method is described to find a risk-adjusted first-order approximation for DSGE models with recursive preferences and stochastic volatility. The method can be applied to a wide class of DSGE models and does not require the primitive shocks to be log-normal. The method is tested using a simple endowment-asset pricing model with stochastic volatility for which I am able to provide an exact closed-form solution. The method captures both the first-order effects (e.g. time varying asset return premiums) of stochastic volatility for which standard perturbation methods require a third-order approximation, and the zeroth-order effects (e.g. on unconditional mean asset return premiums) of stochastic volatility for which standard perturbation methods require higher-than-third-order approximation.