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Federal Reserve Bank of San Francisco
Working Paper Series
A robust Hansen-Sargent prediction formula
Kenneth Kasa
Abstract

This paper derives a formula for the optimal forecast of a discounted sum of future values of a random variable. This problem reflects a preference for robustness in the presence of (unstructured) model uncertainty. The paper shows that revisions of a robust forecast are more sensitive to new information, and discusses the relevance of this result to previous findings of excess sensitivity of consumption and asset prices to new information.


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Kenneth Kasa, A robust Hansen-Sargent prediction formula, Federal Reserve Bank of San Francisco, Working Paper Series 2000-11, 2000.
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Keywords: Forecasting ; Consumption (Economics) ; Prices
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