Robustness and ambiguity in continuous time

Lars Hansen and Thomas Sargent

Journal of Economic Theory, 2011, vol. 146, issue 3, 1195-1223

Abstract: We use statistical detection theory in a continuous-time environment to provide a new perspective on calibrating a concern about robustness or an aversion to ambiguity. A decision maker repeatedly confronts uncertainty about state transition dynamics and a prior distribution over unobserved states or parameters. Two continuous-time formulations are counterparts of two discrete-time recursive specifications of Hansen and Sargent (2007) [16]. One formulation shares features of the smooth ambiguity model of Klibanoff et al. (2005) and (2009) [24] and [25]. Here our statistical detection calculations guide how to adjust contributions to entropy coming from hidden states as we take a continuous-time limit.

Keywords: Ambiguity; Robustness; Hidden; Markov; model; Likelihood; function; Entropy; Statistical; detection; error; Smooth; ambiguity (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:3:p:1195-1223

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