Economist Hansen to receive Frontiers of Knowledge Award

Lars Peter Hansen, the David Rockefeller Distinguished Service Professor in Economics and the College, and Professor in Statistics, will receive a BBVA Foundation 2010 Frontiers of Knowledge Award.

The BBVA Foundation seeks “to recognize and encourage world-class research and artistic creation, awarding contributions of lasting impact for their originality, theoretical significance and ability to push back the frontiers of the known world.”

Since 2008, these prizes have been awarded annually in eight different categories. Hansen will receive the prize in the category of Economics, Finance and Management “for making fundamental contributions to our understanding of how economic actors cope with risky and changing environments,” according to the award citation.

Hansen devised properties of a statistical framework that resulted in a widely applicable methodological tool with such diverse uses as the testing of asset pricing theories, analysis of macroeconomic models, and the study of market power. It has become a standard tool for empirical researchers in many areas of economics.

The citation for the award noted that Hansen “has used this approach to explore the interconnections between macroeconomic indicators and asset prices in financial markets, showing in particular how to formulate robust policies in periods of high uncertainty. His work forms the basis for much contemporary empirical research in financial economics.”

Jury members also stressed in the citation that Hansen’s research “has brought greater discipline to economic theory by allowing it to be tested against the empirical evidence.”

Hansen’s early work included devising and applying an estimation approach that exploits economic properties of models. Among other benefits, the expanded econometric toolkit gave economic researchers the ability to test some of the implications of a complex model without having to characterize a full solution to the entire model. This approach has been useful in dynamic models in which agents make many decisions over time in the face of uncertainty. Such complex dynamic environments are often part of modern models of finance and macroeconomics.

Hansen has written with numerous co-authors in a wide range of fields. These collaborations include work with Kenneth J. Singleton in estimating risk aversion with statistical analysis of the joint dependence of time series on savings, consumption, and financial indicators, and with Thomas J. Sargent in examining dynamic macroeconomic models in which consumers and producers in the economy must make decisions in the face of uncertainty about the future.

More recently, Hansen has been working to reconcile financial asset pricing with macroeconomic uncertainty, and he has been at the forefront of those working to understand the linkages between prices of assets, such as stocks and bonds, to macroeconomic risk. “Investors struggle to assess the validity of competing guesses regarding future macroeconomic fluctuations and growth. Currently, I am interested in how fluctuations in stocks and bond prices reflect that struggle to learn,” Hansen said.

Hansen completed a degree in mathematics and political science at Utah State University in 1974, and obtained his PhD in economics in 1978 from the University of Minnesota. The current Director of the Milton Friedman Institute for Research in Economics, Hansen joined the Chicago faculty in 1981.

His paper “Large Sample Properties of Generalized Method of Moments Estimators” Econometrica (1982) is among the most cited publications in the economics field. With Thomas J. Sargent, he co-wrote Robustness (2007).

Hansen is the second member of the economics department to receive the honor. Hugo Sonnenschein, the Adam Smith Distinguished Service Professor in Economics, received the BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Management in 2010. Other winners this year of BBVA Foundation Frontiers of Knowledge Awards include Shinya Yamanaka, a famed stem cell researcher; Donald Knuth, a distinguished computer scientist; and the pioneering biologist E.O. Wilson.