Chen, Andrew Y. - Federal Reserve Board (Board of Governors of the … - 2014
Many theories of asset prices assume time-varying uncertainty in order to generate time-varying risk premia. This paper … generates time-varying uncertainty endogenously, through precautionary saving dynamics. Precautionary motives prescribe that, in … bad times, next period's consumption should be very sensitive to news. This time-varying sensitivity results in time-varying …