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Axiomatic foundations of multiplier preferences
, 2007
"... This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory. Some properties of multiplier preferences are generalized to the broade ..."
Abstract

Cited by 33 (3 self)
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This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory. Some properties of multiplier preferences are generalized to the broader class of variational preferences, recently introduced by Maccheroni, Marinacci and Rustichini (2006). The paper also establishes a link between the parameters of the multiplier criterion and the observable behavior of the agent. This link enables measurement of the parameters on the basis of observable choice data and provides a useful tool for applications. I am indebted to my advisor Eddie Dekel for his continuous guidance, support, and encouragement. I am grateful to Peter Klibanoff and Marciano Siniscalchi for many discussions which resulted in significant improvements of the paper. I would also like to thank Jeff Ely and Todd Sarver for helpful comments and suggestions. This project started after a very stimulating conversation with Tom Sargent and was further shaped by conversations with Lars Hansen. All errors are my own.
Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle
, 2009
"... Empirically, highinterestrate currencies tend to appreciate in the future relative to lowinterestrate currencies instead of depreciating as uncovered interest rate parity (UIP) states. The explanation for the UIP puzzle that I pursue in this paper is that the agents' beliefs are systemati ..."
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Cited by 23 (3 self)
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Empirically, highinterestrate currencies tend to appreciate in the future relative to lowinterestrate currencies instead of depreciating as uncovered interest rate parity (UIP) states. The explanation for the UIP puzzle that I pursue in this paper is that the agents' beliefs are systematically distorted. This perspective receives some support from an extended empirical literature using survey data. I construct a model of exchange rate determination in which ambiguityaverse agents need to solve a filtering problem to form forecasts but face signals about the timevarying hidden state that are of uncertain precision. In the presence of such uncertainty, ambiguityaverse agents take a worstcase evaluation of this precision and respond stronger to bad news than to good news about the payoffs of their investment strategies. Importantly, because of this endogenous systematic underestimation, agents in the next periods will perceive on average positive innovations about the payoffs which will make them reevaluate upwards the profitability of the strategy. As a result, the model's dynamics imply significant expost departures from UIP as equilibrium outcomes. In addition to providing a resolution to the UIP puzzle, the model predicts, consistent with the data, negative skewness and excess kurtosis for currency excess returns and positive average payoffs even for hedged positions.
Northwestern University
, 2005
"... We find a necessary and sufficient condition for exante trade when agents are nonexpected utility maximizers. The condition is that they share subjective beliefs. Our result holds for a class of convex preferences that contains many functional forms used in applications. In a special case of expec ..."
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We find a necessary and sufficient condition for exante trade when agents are nonexpected utility maximizers. The condition is that they share subjective beliefs. Our result holds for a class of convex preferences that contains many functional forms used in applications. In a special case of expected utility, the condition becomes exactly the common prior assumption. It can also be articulated in the language of other functional forms, confirming results existing in the literature, generating new results, and providing a useful tool for applications. Another contribution of this paper is a characterization of a general definition of beliefs for convex preferences. We show that this definition can be characterized in terms of market behavior. Moreover, it coincides with the usual one for an important class of convex invariant biseparable preferences. 1