Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93610
Authors: 
Eisenbach, Thomas M.
Schmalz, Martin C.
Year of Publication: 
2013
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 610
Abstract: 
Motivated by individuals' emotional response to risk at different time horizons, we model an 'anxious' agent - one who is more risk averse with respect to imminent risks than distant risks. Such preferences describe well-documented features of 1) individual behavior, 2) equilibrium prices, and 3) institutions. In particular, we derive implications for financial markets, such as overtrading and price anomalies around announcement dates, as well as a downward-sloping term structure of risk premia, which are found empirically. Since such preferences can lead to dynamic inconsistencies with respect to risk trade-offs, we show that costly delegation of investment decisions is a strategy used to cope with 'anxiety.'
Subjects: 
risk aversion
dynamic inconsistency
JEL: 
D01
D03
D81
G02
G11
G12
Document Type: 
Working Paper

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