Nobel Lecture: Uncertainty Outside and Inside Economic Models
Nobel Lecture: Uncertainty Outside and Inside Economic Models Lars Peter Hansen University of Chicago We must infer what the future situation would be without our interference, and what changes will be wrought by our actions. Fortunately, or unfortunately, none of these pro- cesses is infallible, or indeed ever accurate and complete. ðKnight 1921, 201–2Þ I. Introduction Asset pricing theory has long recognized that financial markets compen- sate investors who are exposed to some components of uncertainty. This is where macroeconomics comes into play. The economywide shocks, the primary concern of macroeconomists, by their nature are not diver- sifiable. Exposures to these shocks cannot be averaged out with exposures to other shocks. Thus returns on assets that depend on these macroeco- nomic shocks reflect “risk” premia and are a linchpin connecting macro- economic uncertainty to financial markets. A risk premium reflects both the price of risk and the degree of exposure to risk. I will be particularly interested in how the exposures to macroeconomic impulses are priced by decentralized security markets. This manuscript was prepared in conjunction with the 2013 Nobel Prize in Economic Sciences. I thank Manuel Arellano, Amy Boonstra, Philip Barrett, Xiaohong Chen, John Cochrane, Maryam Farboodi, Eric Ghysels, Itzhak Gilboa, Massimo Marinacci, Nan Li, Monika Piazzesi, Eric Renault, Scott Richard, Larry Samuelson, Enrique Sentana, Jose´ Scheinkman, Martin Schneider, Stephen Stigler, Harald Uhlig, Amir Yaron, an anonymous referee, and especially Jaroslav Borovicˇka, James Heckman, Thomas Sargent, and Grace Tsiang for helpful comments. [ Journal of Political Economy, 2014, vol. 122, no. 5] © The Nobel Foundation 2013 945 This content downloaded from 142.058.148.178 on June 11, 2019 13:18:18 PM All use subject to University of Chicago Press Terms and Conditions (http://www.journals.uchicago.edu/t-and-c).
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