Robust Inference for Moment Condition Models without Rational Expectations

56 Pages Posted: 20 Oct 2021 Last revised: 2 Feb 2022

See all articles by Xiaohong Chen

Xiaohong Chen

Yale University - Cowles Foundation

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Peter Hansen

Purdue University - Department of Finance

Date Written: October 18, 2021

Abstract

Applied researchers using structural models under rational expectations (RE) often confront empirical evidence of misspecification. In this paper we consider a generic dynamic model that is posed as a vector of unconditional moment restrictions. We suppose that the model is globally misspecified under RE, and thus empirically in a way that is not econometrically subtle. We relax the RE restriction by allowing subjective beliefs to differ from the data-generating probability (DGP) model while still maintaining that the moment conditions are satisfied under the subjective beliefs of economic agents. We use statistical measures of divergence relative to RE to bound the set of subjective probabilities. This form of misspecification alters econometric identification and inferences in a substantial way, leading us to construct robust confidence sets for various set identified functionals.

Keywords: Subjective beliefs, bounded rationality, misspecification sets, nonlinear expectation, divergence, Lagrange multipliers, stochastic dual programming, confidence sets

JEL Classification: C14, C15, C31, C33, G40

Suggested Citation

Chen, Xiaohong and Hansen, Lars Peter and Hansen, Peter, Robust Inference for Moment Condition Models without Rational Expectations (October 18, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-122, Available at SSRN: https://ssrn.com/abstract=3945856 or http://dx.doi.org/10.2139/ssrn.3945856

Xiaohong Chen

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter Hansen

Purdue University - Department of Finance ( email )

West Lafayette, IN 47907-1310
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
116
Abstract Views
626
Rank
434,824
PlumX Metrics