TY  - BOOK
AU  - Maenhout,Pascal J.
AU  - Vedolin,Andrea
AU  - Xing,Hao
ED  - National Bureau of Economic Research.
TI  - Generalized Robustness and Dynamic Pessimism
T2  - NBER working paper series
PY  - 2020///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - April 2020; Hardcopy version available to institutional subscribers
N2  - This paper develops a theory of dynamic pessimism and its impact on asset prices. Notions of time-varying pessimism arise endogenously in our setting as a consequence of agents' concern for model misspecification. We generalize the robust control approach of Hansen and Sargent (2001) by replacing relative entropy as a measure of discrepancy between models by the more general family of Cressie-Read discrepancies. As a consequence, the decision-maker's distorted beliefs appear as an endogenous state variable driving risk aversion, portfolio decisions, and equilibrium asset prices. Using survey data, we estimate time-varying pessimism and find that such a proxy features a strong business cycle component. We then show that using our measure of pessimism helps match salient features in equity markets such as excess volatility and high equity premium
UR  - https://www.nber.org/papers/w26970
UR  - http://dx.doi.org/10.3386/w26970
ER  -