Macroeconomic uncertainty prices when beliefs are tenuous

Lars Peter Hansen, Thomas J. Sargent

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Investors face uncertainty over models when they do not know which member of a set of well-defined “structured models” is best. They face uncertainty about models when they suspect that all of the structured models might be misspecified. We refer to worries about the first type of ignorance as ambiguity concerns and worries about the second type as misspecification concerns. These two types of ignorance about probability distributions of risks add what we call uncertainty components to equilibrium prices of those risks. A quantitative example highlights a representative investor's uncertainties about the size and persistence of macroeconomic growth rates. Our model of preferences under concerns about model ambiguity and misspecification puts nonlinearities into marginal valuations that induce time variations in market prices of uncertainty. These reflect the representative investor's fears of high persistence of low growth rate states and low persistence of high growth rate states.

    Original languageEnglish (US)
    JournalJournal of Econometrics
    DOIs
    StateAccepted/In press - 2020

    Keywords

    • Asset prices
    • Model uncertainty
    • Relative and Chernoff entropy
    • Risk
    • Robustness

    ASJC Scopus subject areas

    • Economics and Econometrics

    Fingerprint Dive into the research topics of 'Macroeconomic uncertainty prices when beliefs are tenuous'. Together they form a unique fingerprint.

    Cite this