# Risk Premium Shock in SW2007

Hello,

I am trying to stochastically simulate the SW2007 paper using the Pfeifer code available here. I would like all parameters to be calibrated to their posterior mean from Table 1 in the SW2007 paper.

I understand that the replication code involves a conversion of the risk premium process with the multiplier. I want to be sure I have done the conversions correctly. As far as I understand, in the Pfeiffer code the conversion is as follows `b_pfeifer = c3*b_sw2007`.

This would mean that there is no change to rho_b which should still be calibrated to 0.22. However, the st dev of this shock would need to be calibrated to a different value. In SW2007, this value is 0.23. Here it would need to be `c3*0.23`. Given `c3 = 0.1244` at posterior mean, this would mean `sigma_b = 0.0286`. This is the only change that would be required to the calibration. Did I do this correctly?

This is confusing because the st dev for risk premium in the Pfeifer code is calibrated to 1.85 which would roughly correspond to `(1/c3)*0.23` instead of `c3*0.23`.

Thanks!
Jai

You are correct. It looks to me as if the reported posterior in the paper is actually `c_3*sigma_b`, . The standard deviation in the mode-file is 0.2425, which is the value reported in the paperâ€™s table 1B. This suggests that the reported value is actually the `c_3*sigma_b`, not `sigma_b` alone.

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Thanks for your response! Thatâ€™s interesting. Had never noticed that before. So, to use your code to match the posterior mean, I would actually calibrate sigma_b with the exact value from the paper. That is, I would set `sigma_b = 0.23` since the paper seems to report `c3*sigma_b` and not sigma_b alone? And your code already has everything set up for `c3*sigma_b` to be used directly?

Yes, my code is original replication files. Thus, the `_mode` file is the one used in the paper and the parameter set there is the one actually used. Given the implementation, the `sigma_b = 0.23` set corresponds to the `c3*sigma_b` used in the paper.

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Thank you very much for your prompt and helpful responses!