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Macroeconomic Uncertainty Prices when Beliefs are Tenuous

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  • Lars Peter Hansen
  • Thomas J. Sargent

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.

Suggested Citation

  • Lars Peter Hansen & Thomas J. Sargent, 2019. "Macroeconomic Uncertainty Prices when Beliefs are Tenuous," NBER Working Papers 25781, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25781
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    32. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
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    5. Osband, Kent & Filoso, Valerio & Capasso, Salvatore, 2024. "The limits of limitless debt," Journal of Macroeconomics, Elsevier, vol. 79(C).
    6. Giulia Piccillo & Poramapa Poonpakdee, 2021. "Effects of Macro Uncertainty on Mean Expectation and Subjective Uncertainty: Evidence from Households and Professional Forecasters," CESifo Working Paper Series 9486, CESifo.

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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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