Robust preference expansions and temporal decomposition of risk

Abstract

1) Robust preference expansions (with Lars Peter Hansen) --- We propose an approximation method for solving dynamic stochastic general equilibrium models in which agents are concerned about model misspecification. The method relies on a perturbation that treats this robust concern as a first-order concept that is preserved as the volatility of the shocks vanishes. The approximation has a clear economic interpretation and generates solutions with consequences of robust preferences that standard perturbation methods only capture using higher-order terms. -------------------------------------------------------------------------------------2) Examining macroeconomic models through the lens of asset pricing (with Lars Peter Hansen) We develop new methods for representing the asset-pricing implications of stochastic general equilibrium models. We provide asset-pricing counterparts to impulse response functions and the resulting dynamic value decompositions (DVDs). These methods quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or investors' compensations. We extend the continuous-time methods developed in Hansen and Scheinkman (2012) and Borovicka et al (2011) by constructing discrete-time, state-dependent, shock-exposure and shock-price elasticities as functions of the investment horizon. Our methods are applicable to economic models that are nonlinear, including models with stochastic volatility.