Anxiety in the Face of Risk

35 Pages Posted: 3 Apr 2013 Last revised: 28 Oct 2015

See all articles by Thomas M. Eisenbach

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Date Written: October 27, 2015

Abstract

We model an ‘anxious’ agent as one who is more risk averse with respect to imminent risks than with respect to distant risks. Based on a utility function that captures individual subjects’ behavior in experiments, we provide a tractable theory relaxing the restriction of constant risk aversion across horizons and show that it generates rich implications. We first apply the model to insurance markets and explain the high premia for short-horizon insurance. Then, we show that costly delegated portfolio management, investment advice, and withdrawal fees emerge as endogenous features and strategies to cope with dynamic inconsistency in intratemporal risk-return tradeoffs.

Keywords: risk premia, insurance, term structure, dynamic inconsistency

JEL Classification: D01, D03, D81, G02, G11, G12

Suggested Citation

Eisenbach, Thomas M. and Schmalz, Martin C. and Schmalz, Martin C., Anxiety in the Face of Risk (October 27, 2015). Available at SSRN: https://ssrn.com/abstract=2243656 or http://dx.doi.org/10.2139/ssrn.2243656

Thomas M. Eisenbach (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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212-720-6089 (Phone)

HOME PAGE: http://teisenbach.github.io/

Martin C. Schmalz

CEPR ( email )

London
United Kingdom

University of Oxford - Finance ( email )

United States

CESifo ( email )

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Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

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Belgium

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