Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty

100 Pages Posted: 9 Dec 2014 Last revised: 1 Sep 2019

See all articles by Marianne Andries

Marianne Andries

University of Toulouse 1 - Toulouse School of Economics (TSE)

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York

Martin C. Schmalz

University of Oxford - Finance; CEPR; CESifo; European Corporate Governance Institute (ECGI)

Date Written: April 1, 2019

Abstract

Inspired by experimental evidence, we amend the recursive utility model to let risk aversion decrease with the temporal horizon. Our pseudo-recursive preferences remain tractable and retain appealing features of the long-run risk framework, notably its success at explaining asset pricing moments. Calibrating the agents’ preferences to explain the market returns observed in the data no longer implies an extreme preference for early resolutions of uncertainty and captures key puzzles in finance on the valuation and demand for risk at long maturities.

Keywords: risk aversion, early resolution, term structure, volatility risk

JEL Classification: D03, D90, G02, G12

Suggested Citation

Andries, Marianne and Eisenbach, Thomas M. and Schmalz, Martin C., Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty (April 1, 2019). FRB of New York Staff Report No. 703, Available at SSRN: https://ssrn.com/abstract=2535919 or http://dx.doi.org/10.2139/ssrn.2535919

Marianne Andries

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Thomas M. Eisenbach (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6089 (Phone)

HOME PAGE: http://teisenbach.github.io/

Martin C. Schmalz

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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