Risk premia in general equilibrium

This paper shows that non-linearities can generate time-varying and asymmetric risk premia over the business cycle. These (empirical) key features become relevant and asset market implications improve substantially when we allow for non-normalities in the form of rare disasters. We employ explicit solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. We find that the curvature of the policy functions affects the risk premium through controlling the individual's effective risk aversion.