Risk, Robustness and Volatility

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9709876 Hansen This project contributes to our understanding of risk, robustness and volatility. There are three distinct parts: 1. Risk Sensitivity and Robustness in Decentralized Economies. Models of dynamic economies are built in which consumers/investors can make decisions based in part upon robustness consideration. The investigation draws upon ideas from recursive utility theory, robust control theory and decentralization under Knightian uncertainty. Of particular interest is how a preference for robustness becomes reflected in equilibrium prices including the market price of risk. 2. Empirical Foundations of Calibration. Alternative ways of integrating estimates from micro data sets into dynamic stochastic general equilibrium models are studied. The project assesses and extends current microeconometric methods to account for agent heterogeneity and credit constraints. It obtains new estimates of the uncertainty surround microeconomic decision making. It investigates the general equilibrium implications of the new microeconometric inputs. 3. Flexible Estimation of Diffusion Models. Diffusion models as models of nonlinear time series are attractive because of the simple manner in which they encode information such as hitting time probabilities and long run stationary distributions. Particular attention is devoted to characterizing the manner in which the diffusion coefficient or local variance depends on the Markov state. In nonlinear diffusion models, this dependence alone can be sufficient to pull the process back to the center of its distribution. Time series versions of sieve methods are employed to provide the volatility characterization of interest. ??