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Beliefs, Doubts and Learning: Valuing Economic Risk

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  • Lars Peter Hansen

Abstract

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12948.

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Date of creation: Mar 2007
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Handle: RePEc:nbr:nberwo:12948

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Citations

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Cited by:
  1. Aggarwal, Raj & Kearney, Colm & Lucey, Brian, 2012. "Gravity and culture in foreign portfolio investment," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 525-538.
  2. Lex Borghans & Bart H.H. Golsteyn & James J. Heckman & Huub Meijers, 2009. "Gender Differences in Risk Aversion and Ambiguity Aversion," NBER Working Papers 14713, National Bureau of Economic Research, Inc.
  3. Raman Uppal & Harjoat Bhamra, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," 2013 Meeting Papers 1344, Society for Economic Dynamics.
  4. Lars Peter Hansen, 2008. "Modeling the Long Run: Valuation in Dynamic Stochastic Economies," NBER Working Papers 14243, National Bureau of Economic Research, Inc.
  5. Lubos Pastor & Robert F. Stambaugh, 2009. "Are Stocks Really Less Volatile in the Long Run?," NBER Working Papers 14757, National Bureau of Economic Research, Inc.
  6. Lars Peter Hansen, 2011. "Comment on "House Price Booms and the Current Account"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 132-143 National Bureau of Economic Research, Inc.
  7. Sujoy Mukerji & Kevin Sheppard & Fabrice Collard and Jean-Marc Tallon, 2011. "Ambiguity and the historical equity premium," Economics Series Working Papers 550, University of Oxford, Department of Economics.
  8. Emi Nakamura & Dmitriy Sergeyev & Jón Steinsson, 2012. "Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence," NBER Working Papers 18128, National Bureau of Economic Research, Inc.
  9. Aurelien Baillon & Olivier L'Haridon & Laetitia Placido, 2011. "Ambiguity Models and the Machina Paradoxes," American Economic Review, American Economic Association, vol. 101(4), pages 1547-60, June.
  10. Kearney, Colm, 2012. "Emerging markets research: Trends, issues and future directions," Emerging Markets Review, Elsevier, vol. 13(2), pages 159-183.
  11. Andrade, Philippe & Crump, Richard K. & Eusepi, Stefano & Moench, Emanuel, 2013. "Noisy information and fundamental disagreement," Staff Reports 655, Federal Reserve Bank of New York.
  12. Demian Pouzo & Ignacio Presno, 2012. "Sovereign default risk and uncertainty premia," Working Papers 12-11, Federal Reserve Bank of Boston.
  13. Laura Veldkamp & Anna Orlik, 2013. "Understanding Uncertainty Shocks," 2013 Meeting Papers 391, Society for Economic Dynamics.

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