We ask how idiosyncratic labor-market risk varies over the business cycle. A difficulty in addressing this question is the limited time-series dimension of existing panel data sets. We address this difficulty by developing a GMM estimator which conditions on the macroeconomic history experienced...

This paper investigates the welfare costs of business cycles in a heterogeneous agent, overlapping generations economy which is distinguished by idiosyncratic labor market risk. Aggregate variation arises both in terms of aggregate productivity shocks and countercyclical variation in the...

What is the effect of non-tradeable idiosyncratic risk on asset-market risk premiums? Constantinides and Duffie (1996) and Mankiw (1986) have shown that risk premiums will increase if the idiosyncratic shocks become more volatile during economic contractions. We add two important ingredients to...

Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets like the market for mortgage backed securities or credit...

Much recent business cycle research focuses on moments of macroeconomic aggregates. We construct examples of real business cycle sample paths for output, consumption, and employment for the U.S. economy. Annual sample paths are generated from an initial condition in 1925, measured technology and...

that central banks incur for implementing Taylor rule type policies.

By solving an incomplete-markets model of multiperiod bond pricing {\it backwards}, we show that the mean and autocorrelation properties of the term premiums in the yield curve can be a reflection of the temporal distribution of uninsurable income shocks, {\it i.e.}, the term structure of...

The authors examine the relationship between changes in short-term interest rates induced by monetary policy and the yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of...

We investigate the dynamic portfolio problem of a market-maker for a derivative security whose preferences exhibit uncertainty aversion (Knightian uncertainty). The Choquet-expected utility implied by such preference is used to capture the feature that the trader is uncertain about which model...

Much recent business cycle research focuses on moments of macroeconomic aggregates. We construct examples of real business cycle sample paths for output, consumption, and employment for the U.S. economy. Annual sample paths are generated from an initial condition in 1925, measured technology and...