This paper explores two perspectives on the rational expectations hypothesis. One perspective is that of economic agents in such a model, who form inferences about the future using probabilities implied by the model. The other is that of an econometrician who makes inferences about the probability model that economic agents are presumed to use. Typically it is assumed that economic agents know more than the econometrician, and econometric ambiguity is often withheld from the economic agents. To understand better both of these perspectives and the relation between them, I appeal to statistical decision theory to characterize when learning or discriminating among competing probability models is challenging. I also use choice theory under uncertainty to explore the ramifications of model uncertainty and learning in environments in which historical data may be insufficient to yield precise probability statements. I use both tools to reassess the macroeconomic underpinnings of asset pricing models. I illustrate how statistical ambiguity can alter the risk-return tradeoff familiar from asset pricing; and I show that when real time learning is included risk premia are larger when macroeconomic growth is lower than average.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12948.
Length: Date of creation: Mar 2007 Date of revision: Handle: RePEc:nbr:nberwo:12948
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Find related papers by JEL classification: C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy G1 - Financial Economics - - General Financial Markets G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Lucas, Robert E, Jr & Prescott, Edward C, 1971.
"Investment Under Uncertainty,"
Econometrica,
Econometric Society, vol. 39(5), pages 659-81, September.
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