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Small noise methods for risk-sensitive/robust economies

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  • Anderson, Evan W.
  • Hansen, Lars Peter
  • Sargent, Thomas J.

Abstract

We provide small noise expansions for the value function and decision rule for the recursive risk-sensitive preferences specified by Hansen and Sargent (1995), Hansen et al. (1999), and Tallarini (2000). We use the expansions (1) to provide a fast method for approximating solutions of dynamic stochastic problems and (2) to quantify the effects on decisions of uncertainty and concerns about robustness to misspecification.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 4 ()
Pages: 468-500

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:4:p:468-500

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Computational economics; Recursive utility; Perturbation methods; Stochastic growth model;

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References

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  1. Noah Williams, 2003. "Small Noise Asymptotics for a Stochastic Growth Model," NBER Working Papers 10194, National Bureau of Economic Research, Inc.
  2. Lars Peter Hansen & Thomas J. Sargent, 2007. "Introduction to Robustness," Introductory Chapters, Princeton University Press.
  3. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 116(2), pages 260-302, 04.
  4. Baoline Chen & Peter A. Zadrozny, 2003. "Higher-Moments in Perturbation Solution of the Linear-Quadratic Exponential Gaussian Optimal Control Problem," Computational Economics, Society for Computational Economics, vol. 21(1_2), pages 45-64, 02.
  5. Lars Peter Hansen & Thomas J. Sargent & Thomas D. Tallarini Jr., 1997. "Robust Permanent Income and Pricing," Levine's Working Paper Archive 596, David K. Levine.
  6. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 1169-85, July.
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  8. Santos, Manuel S., 1994. "Smooth dynamics and computation in models of economic growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(3-4), pages 879-895.
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  10. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  11. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
  12. Judd, Kenneth L., 1996. "Approximation, perturbation, and projection methods in economic analysis," Handbook of Computational Economics, Elsevier, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 12, pages 509-585 Elsevier.
  13. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
  14. Thomas Tallarini, . "Risk-Sensitive Real Business Cycles," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-35, Carnegie Mellon University, Tepper School of Business.
  15. Hansen, Lars Peter & Heaton, John & Lee, Junghoon & Roussanov, Nikolai, 2007. "Intertemporal Substitution and Risk Aversion," Handbook of Econometrics, Elsevier, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 61 Elsevier.
  16. Evan W. Anderson & Lars Peter Hansen & Thomas J. Sargent, 2003. "A Quartet of Semigroups for Model Specification, Robustness, Prices of Risk, and Model Detection," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(1), pages 68-123, 03.
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Cited by:
  1. Cho, In-Koo & Kasa, Kenneth, 2014. "An escape time interpretation of robust control," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 42(C), pages 1-12.
  2. Boyarchenko, Nina, 2012. "Ambiguity shifts and the 2007–2008 financial crisis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(5), pages 493-507.

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