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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- Jianjun Miao & Neng Wang, 2010.
"Risk, uncertainty,and option exercise,"
Boston University - Department of Economics - Working Papers Series
WP2010-029, Boston University - Department of Economics.
- Jianjun Miao & Neng Wang, 2004. "Risk, Uncertainty, and Option Exercise," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-136, Boston University - Department of Economics.
- Jianjun Miao, 2004. "Risk, uncertainty and option exercise," Finance 0410013, EconWPA.
- Jianjun Miao & Neng Wang, 2007. "Risk, Uncertainty, and Option Exercise," Boston University - Department of Economics - Working Papers Series WP2007-016, Boston University - Department of Economics.
- Kolyuzhnov, Dmitri & Bogomolova, Anna & Slobodyan, Sergey, 2014.
"Escape dynamics: A continuous-time approximation,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 38(C), pages 161-183.
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- Dutta, Prajit K & Radner, Roy, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 769-98, October.
- Anderson, Evan W. & Hansen, Lars Peter & Sargent, Thomas J., 2012. "Small noise methods for risk-sensitive/robust economies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 468-500.
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