To construct a business cycle model consistent with the observed behavior of asset prices, and study the effect of shocks to aggregate uncertainty, I introduce a small, time-varying risk of economic disaster in a standard real business cycle model. The paper establishes two simple theoretical...

Most macroeconomic models fail to replicate the level, volatility, and countercyclicality of risk premia which has been documented in empirical research. In this paper, I introduce a tractable business cycle model with a small, exogenously time-varying risk of economic disaster. Both asset...

To construct a business cycle model consistent with the observed behavior of asset prices, and study the effect of shocks to aggregate uncertainty, I introduce a small, time-varying risk of economic disaster in a standard real business cycle model. The paper establishes two simple theoretical...