Title

Anxiety in the Face of Risk

Author(s)

Thomas M. Eisenbach Thomas Eisenbach (Federal Reserve Bank of New York)

Martin C. Schmalz Martin Schmalz (Princeton University)

Abstract

We model an anxious agent as one who is more risk averse for imminent than for distant risk. Such preferences can lead to dynamic inconsistencies with respect to risk trade-offs. We derive implications for financial markets such as a term structure in risk premia, as well as overtrading and price anomalies around announcement dates, which are found empirically. We show that strategies to cope with anxiety can explain costly delegation of investment decisions. Finally, we model how an anxiety-prone agent may endogenously become overconfident and take excessive risks.

Creation Date

2011-11

Section URL ID

ET

Paper Number

wp029_2011_Eisenbach_Schmalz.pdf

URL

http://detc.princeton.edu/wp-content/uploads/2016/11/wp029_2011_Eisenbach_Schmalz.pdf

File Function

Jel

C200, C020, E220, G110

Keyword(s)

Suppress

false

Series

10