Risk-Sensitive Consumption and Savings under Rational Inattention

Luo, Yulei; Young, Eric

doi:10.1257/mac.2.4.281

Cited by 36 publications

(45 citation statements)

References 37 publications

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“…In addition, following the RI literature, we assume that ξ t is independent of the Brownian motion governing the fundamental shock, B t . 32 To model RI due to finite capacity, we follow Sims (2003) and impose the following constraint on the consumer's information-processing ability:…”

Section: Information-processing Constraintmentioning

confidence: 99%

“…In other words, rational investors use all of their channel capacity, κ, to reduce the uncertainty upon new observations. To 32 In the traditional signal extraction literature, sometimes it is assumed that the fundamental shock and the noise shock (or measure errors) are correlated. In real systems, we do observe correlated shocks and noises.…”

Section: Information-processing Constraintmentioning

confidence: 99%

“…In this MU-SU model, let model P denote the approximating model, (32) and model Q be the distorted model, (37). Because both models P and Q are arithmetic Brownian motions with constant drift and diffusion coefficients under MU-SU, the log-likelihood ratios are normally distributed random variables.…”

Section: Calibrating the Robustness Parameter In The Rb-ri Modelmentioning

confidence: 99%

“…7 In robust control problems, agents are concerned about the possibility that their true model is misspecified in a manner that is difficult to detect statistically; consequently, they choose their decisions as if the subjective distribution over shocks was chosen by an evil agent to minimize their utility. As discussed in Hansen, Sargent, and Tallarini (HST, 1999) and Luo and Young (2010), RB models can produce precautionary savings even within the class of LQG models, which leads to analytical simplicity. 8 Sims (2003) first introduced information-processing constraint (rational inattention or RI) into economics and argued that it is a plausible method for introducing sluggishness, randomness, and delay into economic models.…”

Section: Introductionmentioning

confidence: 99%

“…In addition, the state uncertainty considered in this paper is not only from the income process but also from the equity return. Finally, this paper is also related with the work on robust/risk-sensitive/rational inattention permanent income models such as Hansen, Sargent, and Tallarini (1999), Luo (2008), and Luo and Young (2010). The key difference between this paper and the papers mentioned above is that they adopted the linear-quadratic permanent income framework with constant asset returns to study consumption and saving dynamics and did not consider the portfolio choice problem.…”

Section: Introductionmentioning

confidence: 99%

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Robustly Strategic Consumption–Portfolio Rules with Informational Frictions

Luo

2017

Management Science

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This paper provides a tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework to explore how the interactions of fundamental uncertainty, model uncertainty due to a preference for robustness (RB), and state uncertainty due to information-processing constraints (rational inattention or RI) affect strategic consumption-portfolio rules and precautionary savings in the presence of uninsurable labor income. Specifically, after solving the model explicitly, I compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion, robustness, and inattention. Furthermore, for plausibly estimated and calibrated model parameters, I quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset, and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels. JEL Classification Numbers: C61, D81, E21.

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Section: Information-processing Constraintmentioning

confidence: 99%

Section: Information-processing Constraintmentioning

confidence: 99%

Section: Calibrating the Robustness Parameter In The Rb-ri Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Robustly Strategic Consumption–Portfolio Rules with Informational Frictions

Luo

2017

Management Science

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Model Uncertainty, State Uncertainty, and State-Space Models

2013

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State-space models have been increasingly used to study macroeconomic and financial problems. A state-space representation consists of two equations, a measurement equation which links the observed variables to unobserved state variables and a transition equation describing the dynamics of the state variables. In this paper, we show that a classic linear-quadratic macroeconomic framework which incorporates two new assumptions can be analytically solved and explicitly mapped to a state-space representation. The two assumptions we consider are the model uncertainty due to concerns for model misspecification (robustness) and the state uncertainty due to limited information constraints (rational inattention). We show that the state-space representation of the observable and unobservable can be used to quantify the key parameters on the degree of model uncertainty. We provide examples on how this framework can be used to study a range of interesting questions in macroeconomics and international economics.

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Markov decision processes with risk-sensitive criteria: an overview

Bäuerle,

Jaśkiewicz

2024

Math Meth Oper Res

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The paper provides an overview of the theory and applications of risk-sensitive Markov decision processes. The term ’risk-sensitive’ refers here to the use of the Optimized Certainty Equivalent as a means to measure expectation and risk. This comprises the well-known entropic risk measure and Conditional Value-at-Risk. We restrict our considerations to stationary problems with an infinite time horizon. Conditions are given under which optimal policies exist and solution procedures are explained. We present both the theory when the Optimized Certainty Equivalent is applied recursively as well as the case where it is applied to the cumulated reward. Discounted as well as non-discounted models are reviewed.

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Risk-Sensitive Consumption and Savings under Rational Inattention

Cited by 36 publications

References 37 publications

Robustly Strategic Consumption–Portfolio Rules with Informational Frictions

Robustly Strategic Consumption–Portfolio Rules with Informational Frictions

Model Uncertainty, State Uncertainty, and State-Space Models

Markov decision processes with risk-sensitive criteria: an overview

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