A robust Hansen-Sargent prediction formula
This paper derives a formula for the optimal forecast of a discounted sum of future values of a random variable. This problem reflects a preference for robustness in the presence of (unstructured) model uncertainty. The paper shows that revisions of a robust forecast are more sensitive to new information, and discusses the relevance of this result to previous findings of excess sensitivity of consumption and asset prices to new information.
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|Date of creation:||2000|
|Publication status:||Published in Economics Letters (April 2001, v. 71 no. 1, p43-48)|
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- Hansen, Lars Peter & Sargent, Thomas J., 1980.
"Formulating and estimating dynamic linear rational expectations models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 2(1), pages 7-46, May.
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"Model Uncertainty, Robust Policies, And The Value Of Commitment,"
Cambridge University Press, vol. 6(01), pages 145-166, February.
- Kenneth Kasa, 1999. "Model uncertainty, robust policies, and the value of commitment," Working Paper Series 99-14, Federal Reserve Bank of San Francisco.
- Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.