TY - JOUR
AU - Hansen, Lars Peter
TI - Beliefs, Doubts and Learning: Valuing Economic Risk
JF - National Bureau of Economic Research Working Paper Series
VL - No. 12948
PY - 2007
Y2 - March 2007
DO - 10.3386/w12948
UR - http://www.nber.org/papers/w12948
L1 - http://www.nber.org/papers/w12948.pdf
N1 - Author contact info:
Lars P. Hansen
Department of Economics
The University of Chicago
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-8170
Fax: 773/702-8490
E-Mail: lhansen@uchicago.edu
AB - This paper explores two perspectives on the rational expectations hypothesis. One perspective is that of economic agents in such a model, who form inferences about the future using probabilities implied by the model. The other is that of an econometrician who makes inferences about the probability model that economic agents are presumed to use. Typically it is assumed that economic agents know more than the econometrician, and econometric ambiguity is often withheld from the economic agents. To understand better both of these perspectives and the relation between them, I appeal to statistical decision theory to characterize when learning or discriminating among competing probability models is challenging. I also use choice theory under uncertainty to explore the ramifications of model uncertainty and learning in environments in which historical data may be insufficient to yield precise probability statements. I use both tools to reassess the macroeconomic underpinnings of asset pricing models. I illustrate how statistical ambiguity can alter the risk-return tradeoff familiar from asset pricing; and I show that when real time learning is included risk premia are larger when macroeconomic growth is lower than average.
ER -