Anxiety in the face of risk

No 610, Staff Reports from Federal Reserve Bank of New York

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 structures; dynamic inconsistency (search for similar items in EconPapers)
JEL-codes: D01 D03 D81 G02 G11 G12 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-mic, nep-neu and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Anxiety in the face of risk (2016)
Working Paper: Anxiety in the Face of Risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:610

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