Staff Reports
Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty
Previous title: "Asset Pricing with Horizon-Dependent Risk Aversion"
December 2014 Number 703
Revised July 2023
JEL classification: D03, D90, G02, G12

Authors: Marianne Andries, Thomas Eisenbach, and Martin C. Schmalz

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.
Available only in PDF
Author disclosure statement(s)
E-mail Alerts
By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close