Robust Permanent Income and Pricing
The authors offer an explanation of the equity premium puzzle (that the observed market price of risk implies an implausibly high degree of risk aversion on the part of expected-utility maximizing agents) by appealing to risk-sensitivity in a representative-agent dynamic economy, and the implied market price of risk is obtained as a function of the risk-sensitivity parameter alone. Equivalence with a formulation based on preference for robustness is also shown. The starting point of the paper is the result that as far as consumption-saving decisions are concerned, expected utility maximisers are indistinguishable from risk-sensitive agents with lower discount factors; the intuition is that risk sensitivity strengthens the precautionary motive for saving, but this change is offset by a lesser concern for the future. Given this, the authors consider different kinds of agents -- expected utility maximisers and others with differing degrees of risk sensitivity -- all generating the consumption-investment time series corresponding to US 1970-1996 data, and show that risk sensitivity does have the effects one would expect on the market price of risk. To understand this implication consider the familiar equation expressing the current price of an asset as the expectation, conditional on available information, of the product of the asset's next period gross return (dividend plus selling price) times a (stochastic) discount factor, say \(m\); then the market price of risk is the (conditional) standard deviation of \(m\) divided by its mean. The authors show that risk-sensitivity results in a muliplicative distortion of \(m\) which leaves its mean unaltered but amplifies its standard deviation. Equivalent results are shown to hold under the alternative, robustness-based interpretation.
- scientific article; zbMATH DE number 1790587
- A note on robustness in Merton's model of intertemporal consumption and portfolio choice
- Intertemporal Asset Pricing under Knightian Uncertainty
- Equity premium and consumption sensitivity when the consumer-investor allows for unfavorable circumstances.
- A resolution of the equity premium puzzle
- Robust optimal portfolio choice under Markovian regime-switching model
- Reexamining the robustness of the market value of equity
- Recursive multiple-priors.
- Equity premium and consumption sensitivity when the consumer-investor allows for unfavorable circumstances.
- An exploration of the effects of pessimism and doubt on asset returns.
- Robust valuation, arbitrage ambiguity and profit \& loss analysis
- Continuous-time smooth ambiguity preferences
- The Asian financial crisis and international reserve accumulation: a robust control approach
- Asset prices in an ambiguous economy
- The pricing of Asian options in uncertain volatility model
- The risk transfer of non-tradable risks under model uncertainty
- Conditional comonotonicity
- Robust control: A note on the timing of model uncertainty
- Robust control: a note on the response of the control to changes in the ``free parameter conditional on the character of nature
- Conditional preferences and updating.
- Ambiguity in asset pricing and portfolio choice: a review of the literature
- Model uncertainty and intertemporal tax smoothing
- Macroeconomic uncertainty prices when beliefs are tenuous
- Structured ambiguity and model misspecification
- Ignorance, pervasive uncertainty, and household finance
- Estimating robustness
- A theoretical foundation of ambiguity measurement
- When does ambiguity fade away?
- Decision making in phantom spaces
- The PDEs and numerical scheme for derivatives under uncertainty volatility
- Twisted probabilities, uncertainty, and prices
- Directed attention and nonparametric learning
- Recursive robust estimation and control without commitment
- Stochastic optimization and worst-case analysis in monetary policy design
- Robust control and model misspecification
- Doubts or variability?
- Induced uncertainty, market price of risk, and the dynamics of consumption and wealth
- Ambiguity, asset prices, and excess volatility in a pure-exchange economy
- Ambiguity and the Bayesian paradigm
- Optimal consumption and savings with stochastic income and recursive utility
- New results in stochastic cooperative games: strategic coordination for multi-resolution performance robustness
- Linear Quadratic Differential Games: An Overview
- Small noise methods for risk-sensitive/robust economies
- Asset pricing in a Lucas fruit-tree economy with the best and worst in mind
- Sharing risk and ambiguity
- scientific article; zbMATH DE number 1790587 (Why is no real title available?)
- Do Bayesians Learn Their Way Out of Ambiguity?
- The price of risk and ambiguity in an intertemporal general equilibrium model of asset prices
- Robust portfolio choice with stochastic interest rates
- Robust asset-liability management under CRRA utility criterion with regime switching: a continuous-time model
- Expected utility with uncertain probabilities theory
- MODEL UNCERTAINTY AND ITS IMPACT ON THE PRICING OF DERIVATIVE INSTRUMENTS
- LOCK-IN OF EXTRAPOLATIVE EXPECTATIONS IN AN ASSET PRICING MODEL
- A numerical algorithm to find soft-constrained Nash equilibria in scalar LQ-games
- Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?
- A robust Hansen-Sargent prediction formula
- A note on robustness in Merton's model of intertemporal consumption and portfolio choice
- Robust equilibria in indefinite linear-quadratic differential games
- Learning under fear of floating
- Risk premia in general equilibrium
- Stochastic games with unbounded payoffs: applications to robust control in economics
- Ambiguity made precise: A comparative foundation
- Ambiguity aversion, portfolio choice, and life expectancy
- Fuzzy decision-making in asset markets
- The dynamics of risk-sensitive allocations
- Mean and variance optimization of non-linear systems and worst-case analysis
- Robust control with commitment: a modification to Hansen-Sargent
- The tradeoff between risk sharing and information production in financial markets
- Understanding the difference between robust control and optimal control in a linear discrete-time system with time-varying parameters
- Living with ambiguity: prices and survival when investors have heterogeneous preferences for ambiguity
- A two-person dynamic equilibrium under ambiguity
- On the relation between robust and Bayesian decision making
- Solution of macromodels with Hansen-Sargent robust policies: some extensions
- Stochastic control for economic models: past, present and the paths ahead
- Stochastic taxation and asset pricing in dynamic general equilibrium
- A parallel algorithm for semi-infinite programming
This page was built for publication: Robust Permanent Income and Pricing
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4939351)
