Research Publication

May 2019 | Working Paper

Macroeconomic Uncertainty Prices when Beliefs are Tenuous

Lars Peter Hansen and Thomas J. Sargent

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.

For the Non-Expert:

The Price of Macroeconomic Uncertainty with Tenuous Beliefs

Estimation Code – See Appendix B 

Tags: Econometrics, Financial Market Linkages to the Macroeconomy, Uncertainty and Valuation|Export BibTeX >
@article{hansen:2018,
  title={Prices of Macroeconomic Uncertainties with Tenuous Beliefs},
  author={Hansen, Lars Peter and Sargent, Thomas J},
  year={2018}
}