Browsing by Subject "Model uncertainty"
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Item Open Access The Asian financial crisis and international reserve accumulation: a robust control approach(Elsevier, 2018) Lee, Sang Seok; Luk, P.Standard macroeconomic models have difficulties accounting for the surge in international reserves of Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of the Asian Financial Crisis, and identify a rise in concern for model misspecification which is distinct from an increase in income volatility. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.Item Open Access Financial stability under model uncertainty(Elsevier B.V., 2018) Kantur, Z.; Özcan, G.This paper studies how asset price model misspecification affects the conduct of monetary policy under commitment in a New Keynesian model using robust control techniques. We find that monetary policy reacts aggressively to both asset price and inflation shocks to guard herself against worst-case outcome.Item Open Access Measures of model uncertainty and calibrated option bounds(Taylor & Francis, 2009) Pınar, M. Ç.Recently, Cont introduced a quantitative framework for measuring model uncertainty in the context of derivative pricing [Model uncertainty and its impact on the pricing of derivative instruments, Math. Finance, 16(3) (2006), pp. 519-547]. Two measures of model uncertainty were proposed: one measure based on a coherent risk measure compatible with market prices of derivatives and another measure based on convex risk measures. We show in a discrete time, finite state probability setting, that the two measures introduced by Cont are closely related to calibrated option bounds studied recently by King et al. [Calibrated option bounds, Inf. J. Ther. Appl. Financ., 8(2) (2005), pp. 141-159]. The precise relationship is established through convex programming duality. As a result, the model uncertainty measures can be computed efficiently by solving convex programming or linear programming problems after a suitable discretization. Numerical results using S&P 500 options are given.