Beliefs, Doubts and Learning: Valuing Economic Risk

This paper explores two perspectives on the rational expectations hypothesis. One perspective is that of economic agents in such a model, who form inferences about the future using probabilities implied by the model. The other is that of an econometrician who makes inferences about the probability model that economic agents are presumed to use. Typically it is assumed that economic agents know more than the econometrician, and econometric ambiguity is often withheld from the economic agents. To understand better both of these perspectives and the relation between them, I appeal to statistical decision theory to characterize when learning or discriminating among competing probability models is challenging. I also use choice theory under uncertainty to explore the ramifications of model uncertainty and learning in environments in which historical data may be insufficient to yield precise probability statements. I use both tools to reassess the macroeconomic underpinnings of asset pricing models. I illustrate how statistical ambiguity can alter the risk-return tradeoff familiar from asset pricing; and I show that when real time learning is included risk premia are larger when macroeconomic growth is lower than average.

Structural Breaks in the Cointegrated Vector Autoregressive Model

We generalize the cointegrated vector autoregressive model of Johansen (1988, 1991) to allow for structural breaks. We derive the likelihood ratio test for structural breaks occurring at fixed points in time, and show that it is asymptotically chi-squared. Moreover, we show how inference can be made when the null hypothesis is presence of structural breaks. The estimation technique derived for this purpose can be applied to several other generalizations of the standard model, beyond the structural breaks treated here. For example, the new technique can be applied to estimate models with heteroskedasticity. We apply our generalized model to US term structure data, accounting for structural breaks that coincide with the changes in the Fed's policy in September 1979 and October 1982. Contrary to previous findings we cannot reject the long-run implications of the expectations hypothesis.

Aversion to ambiguity and model misspecification in dynamic stochastic environments

Preferences that accommodate aversion to subjective uncertainty and its potential misspecification in dynamic settings are a valuable tool of analysis in many disciplines. By generalizing previous analyses, we propose a tractable approach to incorporating broadly conceived responses to uncertainty. We illustrate our approach on some stylized stochastic environments. By design, these discrete time environments have revealing continuous time limits. Drawing on these illustrations, we construct recursive representations of intertemporal preferences that allow for penalized and smooth ambiguity aversion to subjective uncertainty. These recursive representations imply continuous time limiting Hamilton–Jacobi–Bellman equations for solving control problems in the presence of uncertainty.Published versio

Sequence stratigraphy and architectural elements of the Giant Foresets Formation, northern Taranaki Basin, New Zealand

The modern continental margin in northern Taranaki Basin is underlain by a thick, mud-dominated, Pliocene and Pleistocene succession (Giant Foresets Formation, GFF) clearly imaged in seismic reflection datasets. A study focusing on the geometry and internal reflection character of the GFF has revealed structural, sedimentological, and eustatic controls on its accumulation. Isopach maps prepared for northern Taranaki Basin show shifts through time in the main loci of sediment accumulation of the Mangaa Formation and Giant Foresets Formation. During the Early Pliocene (Opoitian Stage) deposition was focused in the southern part of the Northern Graben. The prograda¬tional front moved into the vicinity of Arawa-1 and Taimana-on the Western Platform during the early-Late Pliocene (Waipipian and Mangapanian Stages), forming large mounded slope fans. Through the latest Pliocene (Mangapanian - lower Nukumaruan Stages) the progradational front moved rapidly to the north and west through and across the Northern Graben to form a distinct shelf-slope depositional front. During the Pleistocene (upper Nukumaruan Stage – Recent), the progradational front straightened out, reaching the present position of the shelf-slope break. Even during the Pleistocene, broad subsidence persisted in the Northern Graben, trapping a proportion of the sediment flux being delivered to this part of the basin. The Late Pliocene part of the GFF, particularly where it prograded on to the Western Platform, displays classic clinoform profiles, with over steepening having resulted in mass-failure of paleoslopes. Major degradation of the shelf edge and slope occurred during the Early Pleistocene, reflecting a change in the calibre and flux of sediment sourced to the continental margin. Detailed examination of part of the GFF not significantly affected by mass-failure indicates that small-scale channel levee and overbank deposits dominate slope deposition, while basin floor deposits are characterised by slope-disconnected muddy and silty basin floor fans, with little lateral continuity between systems. In a sequence stratigraphic context, many of the dominant components of each seismic unit (slumps, fans, and channel-levee complexes) were deposited during the falling (RST) and low (LST) sea level parts of a relative sea level cycle, resulting in highly asymmetric sequences. While the GFF is considered to have minor reservoir potential in terms of containing sandstone-dominated stratigraphic traps, it does afford the opportunity to study in detail how deep-water clastic systems evolved in response to the various factors that control depositional architectures, particularly in a rapidly prograding muddy continen¬tal margin system

New insights into the condensed nature and stratigraphic significance of the Late Neogene Ariki Formation, Taranaki Basin

The Ariki Formation is a distinctive Late Miocene – Early Pliocene marl facies rich in planktic foraminifera, reaching thicknesses in the range 70 - 109 m in most exploration holes drilled into the Western Platform northwest of Taranaki Peninsula. In Awatea-1 and Mangaa-1 in the Northern Graben, however, there are two marl units separated by the Mangaa “B” Sands. The lower unit has the same upper Tongaporutuan and Kapitean age as the lower part of the marl on the Western Platform, and the upper marl has an Upper Opoitian - Waipipian age, similar to the upper part of the Ariki Formation on the platform. In other holes located on the margins of the graben there can be one thin marly horizon, which usually correlates with the upper marl unit in Awatea-1 and Mangaa-1. The presence of two marly units in the Northern Graben, which are probably amalgamated on the western Platform, suggests two periods of late Neogene condensed sedimentation in northern Taranaki Basin arising from siliciclastic sediment starvation, separated by a period of submarine fan accumulation (Mangaa ‘B’ sands) following subsidence of the Northern Graben. We attribute the initial interval of marl accumulation mainly to a marked landward shift in the position of coastal onlap in central and southern Taranaki and in the region east of the Taranaki Fault Zone (southern King Country and northern Wanganui regions), which effectively shut-off the supply of siliciclastic sediment to northern Taranaki Basin, thereby enabling marl to accumulate. The start of accumulation of the upper part of the Ariki Formation and its marly correlatives in and around the Northern Graben, is attributed to a younger (upper Opoitian) landward shift in the position of coastal onlap, this time involving the formation of the Wanganui Basin depocentre and Toru Trough, which trapped the contemporary siliciclastic sediment being supplied from the south. A lower Opoitian phase of progradation between these two phases of retrogradation led to accumulation of the lower part of the Mangaa Formation (Mangaa ’B’ sands), which was limited in its extent to the Northern Graben because bounding normal faults had by then developed sea floor relief precluding mass-emplaced siliciclastic sediment from being deposited on the higher standing Western Platform. The accumulation of Ariki Formation marl in northern Taranaki Basin ended during the mid-Pliocene due to progradation of a thick continental margin wedge (Giant Foresets Formation) across the Northern Graben and Western Platform