TY  - JOUR
AU  - Tornell,Aaron
TI  - Robust-H-infinity Forecasting and Asset Pricing Anomalies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7753
PY  - 2000
Y2  - June 2000
UR  - http://www.nber.org/papers/w7753
L1  - http://www.nber.org/papers/w7753.pdf
N1  - Author contact info:
Aaron Tornell
Department of Economics
UCLA
405 Hilgard Ave, Bunche Hall #8283
Los Angeles, CA  90095-1477
Tel: 310/794-1686
Fax: 310/825-9528
E-Mail: tornell@econ.ucla.edu
AB  - We present an alternative expectation formation mechanism that helps rationalize well known asset pricing anomalies, such as the predictability of excess returns, excess volatility, and the equity-premium puzzle.  As with rational expectations (RE), the expectation formation mechanism we consider is based on a rigorous optimization algorithm that does not presume misperceptions - it simply departs from some of the implicit assumptions that underlie RE.  Agents fear that existence of misspecifications and design strategies that will be robust against a very large class of misspecifications.  The new element is that uncertainty cannot be modeled via probability distributions.  We consider an asset pricing model where uncertainty is represented by unknown disturbance sequences, as in the H-infinity-control literature.  Agents must filter the persistent' and  transitory' components of a sequence of observations in order to make consumption and portfolio decisions.  We find that H-infinity forecasts are more sensitive to news than RE forecasts and equilibrium prices exhibit the anomalies previously mentioned.
ER  -