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Robust Permanent Income And Pricing With Filtering

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Author Info
Hansen, Lars Peter
Sargent, Thomas J.
Wang, Neng E.

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Abstract

A planner and agent in a permanent-income economy cannot observe part of the state, regard their model as an approximation, and value decision rules that are robust across a set of models. They use robust decision theory to choose allocations. Equilibrium prices reflect the preference for robustness and so embody a market price of Knightian uncertainty. We compute market prices of risk and compare them with a model that assumes that the state is fully observed. We use detection error probabilities to constrain a single parameter that governs the taste for robustness.

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File URL: http://journals.cambridge.org/abstract_S1365100502027049
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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 6 (2002)
Issue (Month): 01 (February)
Pages: 40-84
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Handle: RePEc:cup:macdyn:v:6:y:2002:i:01:p:40-84_02

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  1. Marco Tucci, 2006. "Understanding the Difference Between Robust Control and Optimal Control in a Linear Discrete-Time System with Time-Varying Parameters," Computational Economics, Springer, vol. 27(4), pages 533-558, June. [Downloadable!] (restricted)
  2. Antonio Falato, 2003. "Happiness Maintenance and Asset Prices," Finance 0310003, EconWPA. [Downloadable!]
  3. Garlappi, Lorenzo & Uppal, Raman & Wang, Tan, 2005. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," CEPR Discussion Papers 5041, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Larry Epstein & Martin Schneider, 2005. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 519, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  5. Fidel Gonzalez & Arnulfo Rodriguez, 2004. "Robust Control: A Note on the Response of the Control to Changes in the “Free” Parameter Conditional on the Character of Nature," Computational Economics, Springer, vol. 24(3), pages 223-238, March. [Downloadable!] (restricted)
  6. Larry Epstein & Martin Schneider, 2002. "Learning Under Ambiguity," RCER Working Papers 497, University of Rochester - Center for Economic Research (RCER), revised Mar 2005. [Downloadable!]
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  7. Lars Peter Hansen & Thomas J. Sargent, 2005. "Certainty equivalence and model uncertainty," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 17-38. [Downloadable!]
  8. Richard Dennis & Kai Leitemo & Ulf Soderstrom, 2006. "Methods for Robust Control," Working Papers 307, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  9. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics. [Downloadable!]
  10. Aaron Tornell, 2003. "Robust-H_infinity Forecasting and Asset Pricing Anomalies (December 2001)," UCLA Economics Online Papers 237, UCLA Department of Economics. [Downloadable!]
  11. Kilponen, Juha, 2004. "Robust expectations and uncertain models – A robust control approach with application to the New Keynesian economy," Research Discussion Papers 5/2004, Bank of Finland. [Downloadable!]
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  12. Marco P. Tucci, 2009. "How Robust is Robust Control in the Time Domain?," Department of Economics University of Siena 569, Department of Economics, University of Siena. [Downloadable!]
  13. Richard Dennis, 2007. "Model uncertainty and monetary policy," Working Paper Series 2007-09, Federal Reserve Bank of San Francisco. [Downloadable!]
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  14. Garlappi, Lorenzo & Uppal, Raman & Wang, Tan, 2005. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," CEPR Discussion Papers 5148, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  15. Kenneth Kasa, 2006. "Robustness and Information Processing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 1-33, January. [Downloadable!] (restricted)
  16. Massimiliano Amarante, 2003. "Ambiguous Events," Discussion Papers 0304-04, Columbia University, Department of Economics. [Downloadable!]
  17. David Backus & Bryan Routledge & Stanley Zin, 2004. "Exotic Preferences for Macroeconomists," NBER Working Papers 10597, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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