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Author:Andries, Marianne 

Report
Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty
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.
AUTHORS: Andries, Marianne; Eisenbach, Thomas M.; Schmalz, Martin C.
DATE: 2014-12-01

Report
The term structure of the price of variance risk
We estimate the term structure of the price of variance risk (PVR), which helps distinguish between competing asset-pricing theories. First, we measure the PVR as proportional to the Sharpe ratio of short-term holding returns of delta-neutral index straddles; second, we estimate the PVR in a Heston (1993) stochastic-volatility model. In both cases, the estimation is performed separately for different maturities. We find the PVR is negative and decreases in absolute value with maturity; it is more negative and its term structure is steeper when volatility is high. These findings are inconsistent with calibrations of established asset-pricing models that assume constant risk aversion across maturities.
AUTHORS: Wang, Yichuan; Eisenbach, Thomas M.; Schmalz, Martin C.; Andries, Marianne
DATE: 2015-08-01

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