Prices of Macroeconomic Uncertainties with Tenuous Beliefs

A decision maker suspects that parameters of a set of structured parametric probability models vary over time in unknown ways that he does not describe probabilistically. He expresses a fear that all of these parametric models are misspeci ed by also wanting to consider alternative unstructured probability distributions. He restricts these unstructured probability models to be statistically close to the structured parametric models. Because the decision maker is averse to ambiguity, he uses a max-min criterion to evaluate alternative plans. We use this decision theory to construct competitive equilibrium uncertainty prices that confront a robust decision maker who solves a portfolio choice problem and offer a quantitative illustration for structured parametric models that focus uncertainty on macroeconomic growth and its persistence. Nonlinearities in marginal valuations induce time variation in market prices of uncertainty that fluctuate because the investor especially fears high persistence in bad states and low persistence in good states