Macroeconomic Uncertainty Prices when Beliefs are Tenuous

Lars Hansen and Thomas Sargent

No 25781, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A representative investor does not know which member of a set of well-defined parametric "structured models'' is best. The investor also suspects that all of the structured models are misspecified. These uncertainties about probability distributions of risks give rise to components of equilibrium prices that differ from the risk prices widely used in asset pricing theory. A quantitative example highlights a representative investor's uncertainties about the size and persistence of macroeconomic growth rates. Our model of preferences under ambiguity puts nonlinearities into marginal valuations that induce time variations in market prices of uncertainty. These arise because the representative investor especially fears high persistence of low growth rate states and low persistence of high growth rate states.

JEL-codes: C52 C58 D81 D84 E7 G12 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-ore
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Published as Lars Peter Hansen & Thomas J. Sargent, 2020. "Macroeconomic uncertainty prices when beliefs are tenuous," Journal of Econometrics, .

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