Review of Financial Studies Vol. 37 No. 11 2024

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

Marianne Andries¹; Thomas M. Eisenbach²; Martin C. Schmalz³

¹ University of Southern California · ² Federal Reserve Bank of New York · ³ University of Oxford , , CEPR, and ECGI

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. Horizon-dependent risk aversion helps resolve key puzzles in finance on the valuation of assets across maturities and captures the term structure of equity risk premiums and its dynamics.

DOI

10.1093/rfs/hhae049

Volume

37

Issue

11

Pages

3272-3334

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓