Staff Reports
Up Close It Feels Dangerous: "Anxiety" in the Face of Risk
April 2013   Number 610
Revised: July 2015
JEL classification: D01, D03, D81, G02, G11, G12

Authors: Thomas M. Eisenbach and  Martin C. Schmalz

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 the lab, we predict a downward-sloping term structure of risk premia, explain the existence of and high prices in short-horizon insurance markets, and show that costly delegated portfolio management is a strategy to cope with dynamic inconsistency with respect to intra-temporal risk return tradeoffs.

Available only in PDF pdf 36 pages / 671 kb
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