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Uncertainty Outside and Inside Economic Models

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  • Lars Peter Hansen

    () (The University of Chicago)

Abstract

Asset pricing theory has long recognized that financial markets compensate investors who are exposed to some components of uncertainty. This is where macroeconomics comes into play. The economy-wide shocks, the primary concern of macroeconomists, by their nature are not diversifiable. Exposures to these shocks cannot be averaged out with exposures to other shocks. Thus returns on assets that depend on these macroeconomic shocks reflect “risk†premia and are a linchpin connecting macroeconomic uncertainty to financial markets. A risk premium reflects both the price of risk and the degree of exposure to risk. I will be particularly interested in how the exposures to macroeconomic impulses are priced by decentralized security markets.  Â

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  • Lars Peter Hansen, 2014. "Uncertainty Outside and Inside Economic Models," Working Papers 2014-06, Becker Friedman Institute for Research In Economics.
  • Handle: RePEc:bfi:wpaper:2014-06
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    Cited by:

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    2. Thomas J. Sargent, 2015. "Robert E. Lucas Jr.'s Collected Papers on Monetary Theory," Journal of Economic Literature, American Economic Association, vol. 53(1), pages 43-64, March.
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    7. Massimo Marinacci, 2015. "Model Uncertainty," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1022-1100, December.
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    9. Ignacio Escañuela ROMANA, 2016. "Randomness, Determinism and Undecidability in the Economic Cycle Theory," Journal of Economics and Political Economy, KSP Journals, vol. 3(4), pages 638-658, December.
    10. John H. Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985.
    11. Escañuela Romana, Ignacio, 2016. "Azar, Determinismo e Indecidibilidad en la Teoría del Ciclo Económico
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    12. Klaus Abberger & Andreas Dibiasi & Michael Siegenthaler & Jan-Egbert Sturm, 2016. "The Effect of Policy Uncertainty on Investment Plans: Evidence from the Unexpected Acceptance of a Far-Reaching Referendum in Switzerland," CESifo Working Paper Series 5887, CESifo Group Munich.

    More about this item

    Keywords

    uncertainty; Knightian Uncertainty; Asset pricing; dynamic models;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G00 - Financial Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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