Report

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


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;

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Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2017-01-01

Number: 703

Note: Previous title: "Asset Pricing with Horizon-Dependent Risk Aversion"