Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Small Noise Methods for Risk-Sensitive/Robust Economies

April 2012
Evan W. Anderson, Lars Peter Hansen, Thomas J. Sargent

We provide small noise expansions for the value function and decision rule for the recursive risk-sensitive preferences specified by Hansen and Sargent (1995), Hansen et al. (1999), and Tallarini (2000). We use the expansions (1) to provide a fast method for approximating solutions of dynamic stochastic problems and (2) to quantify the effects on decisions of uncertainty and concerns about robustness to misspecification.

Publication Type: 
Article
Journal: 
Journal of Economic Dynamics & Control
Volume: 
36
Issue Number: 
4
Pages: 
468-500