Robustness, Intertemporal Hedging Demands, and Precautionary Savings in a Partially Observable Economy

Professor Luo, Yulei   (Principal Investigator (PI))

Professor Young Eric   (Co-Investigator)

30

2015-12-01

165000

Robustness, Intertemporal Hedging Demands, and Precautionary Savings in a Partially Observable Economy

Entrepreneurial Risk, Fiscal Policy, Robustness, Wealth Distribution

Economics

Business Studies (B)

17500515

General Research Fund (GRF)

2015

Completed

1) To construct a tractable continuous-time general equilibrium asset pricing framework to explore how the interactions of model uncertainty due to robustness and parameter (state) uncertainty due to imperfect observations affect equilibrium consumption, portfolio choice, and asset returns (i.e., the risk-free rate and the equity premium). 2) To solve the model explicitly and explore the relative importance of model uncertainty, parameter uncertainty, risk aversion, and intertemporal substitution in determining the equilibrium portfolio choice, asset returns, precautionary savings, and welfare. 3) To use the detection error probability method and the finite capacity method to calibrate the empirically plausible amount of model and parameter uncertainty, respectively, using the U.S. asset market and macroeconomic data. 4) To extend our benchmark model to consider the regime-switching case in which the expected return of the risky asset depends on an unobservable regime variable of the economy.