Fragile beliefs and the price of uncertainty

By Lars Peter Hansen, Thomas J. Sargent. 2010

209 citations recorded by the source corpus.

A representative consumer uses Bayes’ law to learn about parameters of several models and to construct probabilities with which to perform ongoing model averaging. The arrival of signals induces the consumer to alter his posterior distribution over models and parameters. The consumer’s specification doubts induce him to slant probabilities pessimistically. The pessimistic probabilities tilt toward a model that puts long-run risks into consumption growth. That contributes a countercyclical history-dependent component to prices of risk. Keywords. Learning, Bayes’ law, robustness, risk sensitivity, pessimism, prices of risk. JEL classification. C11, C44, C72, E44, G12.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/2222c508c4bfe82e4238c9a0818dc241ada745b5

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Citations in the corpus

Natural Expectations, Macroeconomic Dynamics, and Asset Pricing (2012, background): “…which would be more realistic and less tractable, would be to 20 Fuster, Hebert, and Laibson assume that agents take the possibility of misspecifi cation into account when making decisions (for such an approach, see the literature on robustness; e.g., Hansen 2007; Hansen and Sargent 2007, 2010).”
Credit Default Swaps: A Survey (2014, background): “18Other papers that focus on counterparty risk and/or liquidity/liquidity risk include Hull and White [2001], Lei and Ap Gwilym [2007], Kraft and Steffensen [2007], Dunbar [2008], Pu et al.”
Wanting robustness in macroeconomics (2010, background): “The idea of solving a deterministic problem to generate key parts of the solution of a stochastic problem originated with Jacobson (1973) and underlies much of linear-quadratic-Gaussian robust control theory (for example, see Hansen and Sargent (2008b)).”
Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence (2012, unknown): “We therefore abstract from learning, doubt, and fragile beliefs (Timmermann, 1993; Pastor and Veronesi, 2009; Hansen, 2007; Hansen and Sargent, 2010; Croce, Lettau, and Ludvigson, 2010).”
A Rational Theory of Mutual Funds' Attention Allocation (2016, unknown): “Finally, agents who fear model misspecification (Hansen and Sargent 2010) or are ambiguity averse (Leippold, Trojani, and Vanini 2008) twist their stochastic discount factors in a way that changes prices of risk.”
Ambiguity and Asset Markets (2010, unknown): “It excludes specifications adopted in Hansen & Sargent (2007, 2009), Barillas et al. (2009), and in several other papers in the robust-control-inspired literature, which violate either consequentialism or dynamic consistency.”
Parameter Learning in General Equilibrium: The Asset Pricing Implications (2016, background): “6 Examples of such alternatives include general Kreps and Porteus (1978) preferences and smooth ambiguity aversion preferences of Klibanoff, Marinacci, and Mukerji (2009) and Ju and Miao (2012), as well as the fragile beliefs setup of Hansen and Sargent (2010).”
Ambiguity, Learning, and Asset Returns (2009, methodology): “These specifications nest Epstein-Zin preferences (Epstein and Zin (1989)), smooth ambiguity preferences (Klibanoff et al. (2005, 2008)), multiplier preferences (Hansen and Sargent (2001, 2008)), and risk-sensitive preferences (Hansen and Sargent (2008) and Tallarini (2000)) as special cases.”
Alpha As Ambiguity: Robust Mean-Variance Portfolio Analysis (2010, unknown): “Hansen and Sargent (2010) consider two risk-sensitivity operators, one of them being a recursive version of the smooth ambiguity model, in a LLR setup and show how sensitive beliefs become to information under model uncertainty; they show how the resulting " model uncertainty premia " a¤ects the…”
Risks for the Long Run: Estimation with Time Aggregation (2012, background): “Giovannini and Weil (1989), Tallarini (2000), Hansen et al. (2008), and Hansen and Sargent (2010) consider a special case where the IES parameter is one.”