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Aversion to ambiguity and model misspecification in dynamic stochastic environments

Author

Listed:
  • Lars Peter Hansen

    (Department of Economics, University of Chicago, Chicago, IL 60637; Department of Statistics, University of Chicago, Chicago, IL 60637; Booth School of Business, University of Chicago, Chicago, IL 60637)

  • Jianjun Miao

    (Department of Economics, Boston University, Boston, MA 02215; Institute of Chinese Financial Studies, Southwestern University of Finance and Economics, Chengdu 610074, China; China Economics and Management Academy, Central University of Finance and Economics, Beijing 100081, China)

Abstract

Preferences that accommodate aversion to subjective uncertainty and its potential misspecification in dynamic settings are a valuable tool of analysis in many disciplines. By generalizing previous analyses, we propose a tractable approach to incorporating broadly conceived responses to uncertainty. We illustrate our approach on some stylized stochastic environments. By design, these discrete time environments have revealing continuous time limits. Drawing on these illustrations, we construct recursive representations of intertemporal preferences that allow for penalized and smooth ambiguity aversion to subjective uncertainty. These recursive representations imply continuous time limiting Hamilton–Jacobi–Bellman equations for solving control problems in the presence of uncertainty.

Suggested Citation

  • Lars Peter Hansen & Jianjun Miao, 2018. "Aversion to ambiguity and model misspecification in dynamic stochastic environments," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 115(37), pages 9163-9168, September.
    • Handle: RePEc:nas:journl:v:115:y:2018:p:9163-9168
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    Citations

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    Cited by:

    1. Hansen, Lars Peter & Sargent, Thomas J., 2022. "Structured ambiguity and model misspecification," Journal of Economic Theory, Elsevier, vol. 199(C).
    2. Jianjun Miao, 2022. "Introduction to the special issue in honor of Larry Epstein," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 329-333, September.
    3. Lars Peter Hansen, 2021. "Uncertainty Spillovers for Markets and Policy," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 371-396, August.
    4. William Brock & Anastasios Xepapadeas, 2022. "Emerging infectious diseases and the economy: climate change, natural world preservation, and containment policies," DEOS Working Papers 2208, Athens University of Economics and Business.
    5. Simone Cerreia-Vioglio & Lars Peter Hansen & Fabio Maccheroni & Massimo Marinacci, 2020. "Making Decisions under Model Misspecification," Papers 2008.01071, arXiv.org, revised Aug 2022.
    6. Michael Barnett & William Brock & Lars Peter Hansen, 2022. "Climate Change Uncertainty Spillover in the Macroeconomy," NBER Macroeconomics Annual, University of Chicago Press, vol. 36(1), pages 253-320.
    7. William Brock & Anastasios Xepapadeas, 2023. "Natural world preservation and infectious diseases: Land-use, climate change and innovation," DEOS Working Papers 2319, Athens University of Economics and Business.
    8. Oleg Itskhoki & Dmitry Mukhin, 2021. "Exchange Rate Disconnect in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2183-2232.
    9. William Brock & Anastasios Xepapadeas, 2022. "Climate Change, Natural World Preservation and the Emergence and Containment of Infectious Diseases," DEOS Working Papers 2232, Athens University of Economics and Business.
    10. Michael Barnett & Greg Buchak & Constantine Yannelis, 2023. "Epidemic responses under uncertainty," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 120(2), pages 2208111120-, January.
    11. Anastasios Xepapadeas, 2022. "On the optimal management of environmental stock externalities," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 119(24), pages 2202679119-, June.
    12. Leyla Jianyu Han & Kenneth Kasa, 2019. "Ambiguity and Information Processing in a Model of Intermediary Asset Pricing," Discussion Papers dp19-04, Department of Economics, Simon Fraser University.
    13. Lars Peter Hansen & Jianjun Miao, 2022. "Asset pricing under smooth ambiguity in continuous time," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 335-371, September.
    14. Arnon Archankul & Giorgio Ferrari & Tobias Hellmann & Jacco J. J. Thijssen, 2023. "Singular Control in a Cash Management Model with Ambiguity," Papers 2309.12014, arXiv.org.
    15. Siliang Zeng & Mingyi Hong & Alfredo Garcia, 2022. "Structural Estimation of Markov Decision Processes in High-Dimensional State Space with Finite-Time Guarantees," Papers 2210.01282, arXiv.org, revised Mar 2024.

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