Research

Lars Peter Hansen is a leading expert in economic dynamics who works at the forefront of economic thinking and modeling. He draws approaches from macroeconomics, finance, and statistics.

Hansen’s current work investigates three interconnecting areas: (1) macroeconomic uncertainty and financial markets; (2) struggling with a complex future; and (3) understanding investor beliefs through asset market data.

In this 4-minute documentary, “Incertitudes”, Lars explains why he seeks to better understand the role uncertainty plays in financial markets and the economy. (Produced by Histoire courtes.)

1. Impact of macroeconomic uncertainty as revealed by financial markets

Applied macroeconomic research quantifies how random impulses or “shocks” to the dynamic economic system transmit throughout the economy and  affect  outcomes over time.

Hansen’s recent collaborative research aims to assign prices to these shocks by building on and extending insights from asset pricing theory.

In financial markets, we know that investors are compensated for their exposure to added macroeconomic uncertainty, but we don’t yet know how or by how much. Hansen’s research seeks to answer the question, “What are the implied investor compensations for exposure to macroeconomic shocks over alternative payoff or investment horizons?”  

Thus, his work is designed to provide a pricing counterpart to the impulse response functions used by macroeconomists. The drive to  identify the long-term impacts of uncertainty motivates this work, and as a result, features revealing characterizations of the importance of the contributions to pricing that persist over time.

Related Research

2. Struggling with a complex future

Hansen and his collaborators explore important questions about the consequences for financial markets when investors are unsure about the future.

Formal and informal evidence from financial markets suggests that the markets vary over time in their concerns about uncertainty. What drives these fluctuations and how are they related to speculations about future macroeconomic performance? How should public policy be designed given our incomplete understanding how policy impacts the economy in subtle and not so subtle ways.

To investigate these issues formally requires a modeling framework where investors within the model sometimes struggle with how to make projections about future economic performance and even about which model is the best one to use

Hansen and his coauthors study how different forms of uncertainty, including risk, ambiguity and their resulting skepticism, impact financial market performance. They seek to advance understanding about the  implications of uncertainty, especially for the design of economic policy.

Relevant Research

3. Investor beliefs as revealed by asset market data

Asset markets are forward-looking. They encode information about investor beliefs about the future and about investors’ concerns for risk. How can we use financial market data to extract information about these two components in a reliable way? Financial market prices can change because investors change their subjective beliefs about the future and because the risk prices that they are exposed to change. This research, which Hansen pursues with his collaborators, investigates this question by formally exploring the interplay among , investors’ beliefs, rational expectations, and the long-term consequences of exposure to risk.

Relevant Research

(See complete paper archive.)