Research Publication

May 2011 | Article

Robustness and Ambiguity in Continuous Time

Lars Peter Hansen, Thomas J. Sargent

We use statistical detection theory in a continuous-time environment to provide a new perspective on calibrating a concern about robustness or an aversion to ambiguity. A decision maker repeatedly confronts uncertainty about state transition dynamics and a prior distribution over unobserved states or parameters. Two continuous-time formulations are counterparts of two discrete-time recursive specifications of Hansen and Sargent (2007) [16]. One formulation shares features of the smooth ambiguity model of Klibanoff et al. (2005) and (2009) [24] and [25]. Here our statistical detection calculations guide how to adjust contributions to entropy coming from hidden states as we take a continuous-time limit.

Journal: Journal of Economic Theory|Volume: 146|Issue Number: 3|Pages: 1195-1223|Tags: Risk, Robustness and Ambiguity|Export BibTeX >
  title={Robustness and Abiguity in Continuous Time},
  author={Hansen, Lars Peter and Sargent, Thomas J.},
  journal={Journal of Economic Theory},