Authors: Marianne Andries, Thomas Eisenbach, and Martin C. Schmalz
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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
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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 January 2024
Revised January 2024
JEL classification: D03, D90, G02, G12
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.
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