Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/169207
Authors: 
Meyer-Gohde, Alexander
Year of Publication: 
2017
Series/Report no.: 
SFB 649 Discussion Paper 2017-017
Abstract: 
I entertain a generalization of the standard Bolzmann-Gibbs-Shannon measure of entropy in multiplier preferences of model uncertainty. Using this measure, I derive a generalized exponential certainty equivalent, which nests the exponential certainty equivalent of the standard Hansen-Sargent model uncertainty formulation and the power certainty equivalent of the popular Epstein-Zin-Weil recursive preferences as special cases. Besides providing a model uncertainty rationale to these risk-sensitive preferences, the generalized exponential equivalent provides additional flexibility in modeling uncertainty through its introduction of pessimism into agents, causing them to overweight events made more likely in the worst case model when forming expectations. In a standard neoclassical growth model, I close the gap to the Hansen-Jagannathan bounds with plausible detection error probabilities using the generalized exponential equivalent and show that Hansen-Sargent and Epstein-Zin-Weil preferences yield comparable market prices of risk for given detection error probabilities.
Subjects: 
model uncertainty
robust control
recursive preferences
equity premium puzzle
Tsallis entropy
JEL: 
C61
C63
E17
Document Type: 
Working Paper

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