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Introducing Financial Assets Into Structural Models

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Executive Summary

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

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