Introducing Financial Assets Into Structural Models

Abstract

This paper reviews extensively the literature on asset pricing and builds a structural dynamic general equilibrium model with financial assets. We obtain the policy function of the calibrated model and approximate it up to third order. We derive asset pricing and various premiums conditions up to the third order, meaning that returns depend on the first three conditional moments. We obtain a hypothetic yield curve whose curvature increases with the order of the approximation because of the premiums. In addition, impulse response functions of various fundamental shocks illustrate the effect on the level and slope of bond yields with several maturities and on breakeven inflation. Important shocks are technology and inflation target shocks