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

Marianne Andries, Thomas Eisenbach and Martin C. Schmalz

No 703, Staff Reports from Federal Reserve Bank of New York

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. In addition, our model addresses two challenges to the standard model. Calibrating the agents’ preferences to explain the equity premium no longer implies an extreme preference for early resolutions of uncertainty. Horizondependent risk aversion helps resolve key puzzles in finance on the valuation of assets across maturities and captures the term structure of equity risk premia and its dynamics.

Keywords: risk aversion; early resolution; term structures; volatility risk (search for similar items in EconPapers)
JEL-codes: D90 G12 (search for similar items in EconPapers)
Pages: 87
Date: 2014-12-01
New Economics Papers: this item is included in nep-rmg and nep-upt
Note: Revised July 2023. Previous title: "Asset Pricing with Horizon-Dependent Risk Aversion".
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty (2024)
Working Paper: Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty (2024)
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