Research Publication

May 2022 | Working Paper

New Working Paper: “Risk, Ambiguity, and Misspecification: Decision Theory, Robust Control, and Statistics”

Lars Peter Hansen and Thomas J. Sargent

Abstract

We use the variational preferences of Maccheroni et al. (2006a) in new ways to make contact with statistics and econometrics. We use relative entropy and other statistical divergences as cost functions in a variational preference representation of someone who is ambiguous in the sense of not having a unique prior over a discrete set or manifold of statistical models (i.e., likelihood functions) and who suspects that each statistical model is misspecified. We connect variational preferences to theories of robust control and statistical approximation.

Keywords— Variational preferences, statistical divergence, relative entropy, prior, likelihood, ambiguity, misspecification

Tags: Econometrics, Risk, Robustness and Ambiguity|