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Robustness and ambiguity in continuous time

Robustness and ambiguity in continuous time,10.1016/j.jet.2011.01.004,Journal of Economic Theory,Lars Peter Hansen,Thomas J. Sargent

Robustness and ambiguity in continuous time   (Citations: 1)
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We use statistical detection theory in a continuous-time environment to provide a new perspective on calibrating a concern about robustness or an aversion to ambiguity. A decision maker repeatedly confronts uncertainty about state transition dynamics and a prior distribution over unobserved states or parameters. Two continuous-time formulations are counterparts of two discrete-time recursive specifications of Hansen and Sargent (2007) [16]. One formulation shares features of the smooth ambiguity model of Klibanoff et al. (2005) and (2009) [24,25]. Here our statistical detection calculations guide how to adjust contributions to entropy coming from hidden states as we take a continuous-time limit.
Journal: Journal of Economic Theory - J ECON THEOR , vol. 146, no. 3, pp. 1195-1223, 2011
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