Macroeconomic Uncertainty Prices when Beliefs are Tenuous / Lars Peter Hansen, Thomas J. Sargent.

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Hansen, Lars Peter

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25781.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: A representative investor does not know which member of a set of well-defined parametric "structured models'' is best. The investor also suspects that all of the structured models are misspecified. These uncertainties about probability distributions of risks give rise to components of equilibrium prices that differ from the risk prices widely used in asset pricing theory. A quantitative example highlights a representative investor's uncertainties about the size and persistence of macroeconomic growth rates. Our model of preferences under ambiguity puts nonlinearities into marginal valuations that induce time variations in market prices of uncertainty. These arise because the representative investor especially fears high persistence of low growth rate states and low persistence of high growth rate states.

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Previous	nber w25779 Climatic Constraints on Aggregate Economic Output /	nber w2578 Centre For Labour Economics /	nber w25780 Land Reform and Productivity: A Quantitative Analysis with Micro Data /	nber w25781 Macroeconomic Uncertainty Prices when Beliefs are Tenuous /	nber w25782 The International Monetary and Financial System /	nber w25783 Long-Run Tax Incidence in a Human Capital-based Endogenous Growth Model with Labor-Market Frictions /	nber w25784 Paid Family Leave and Breastfeeding: Evidence from California /	Next

April 2019.

A representative investor does not know which member of a set of well-defined parametric "structured models'' is best. The investor also suspects that all of the structured models are misspecified. These uncertainties about probability distributions of risks give rise to components of equilibrium prices that differ from the risk prices widely used in asset pricing theory. A quantitative example highlights a representative investor's uncertainties about the size and persistence of macroeconomic growth rates. Our model of preferences under ambiguity puts nonlinearities into marginal valuations that induce time variations in market prices of uncertainty. These arise because the representative investor especially fears high persistence of low growth rate states and low persistence of high growth rate states.