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

Schmalz, Martin C., Andries, Marianne and Eisenbach, Thomas M. (2018) Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty. Federal Reserve Bank of New York.

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We address two fundamental critiques of established asset pricing models: that they (1) require a controversial degree of preference for early resolution of uncertainty; and (2) do not match the
term structures of risk premia observed in the data. Inspired by experimental evidence, we construct preferences in which risk aversion decreases with the temporal horizon. The resulting
model implies term structures of risk premia consistent with the evidence, including timevariations and reversals in the slope, without imposing a particular preference for early or late
resolutions of uncertainty or compromising on the ability to match standard moments in the returns distributions.

Item Type: Other Working Paper
Keywords: risk aversion, early resolution, term structure, volatility risk, finance
Subject(s): Finance
Date Deposited: 10 Jan 2019 15:55
Last Modified: 10 Jan 2019 15:59
Funders: n/a
URI: http://eureka.sbs.ox.ac.uk/id/eprint/7233

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