An Escape Time Interpretation of Robust Control
This paper studies the problem of an agent who wants to prevent the state from exceeding a critical threshold. Even though the agent is presumed to know the model, the optimal policy is computed by solving a conventional robust control problem. That is, robustness is induced here by objectives rather than uncertainty, and so is an example of the duality between risk-sensitivity and robustness. However, here the agent only incurs costs upon escape to a critical region, not during ‘normal times’. We argue this is often a more realistic model of macroeconomic policymaking.
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- Kolyuzhnov, Dmitri & Bogomolova, Anna & Slobodyan, Sergey, 2014.
"Escape dynamics: A continuous-time approximation,"
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"Risk, Uncertainty, and Option Exercise,"
Boston University - Department of Economics - Working Papers Series
WP2007-016, Boston University - Department of Economics.
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"Axiomatic Foundations of Multiplier Preferences,"
14397610, Harvard University Department of Economics.
- Prajit K. Dutta & Roy Radner, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 769-798.
- Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
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