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Anxiety in the Face of Risk

Listed author(s):
  • Thomas M. Eisenbach

    (Federal Reserve Bank of New York)

  • Martin C. Schmalz

    (Princeton University)

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.

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Paper provided by Princeton University, Department of Economics, Econometric Research Program. in its series Working Papers with number 1371.

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Date of creation: Nov 2011
Handle: RePEc:pri:metric:wp029_2011_eisenbach_schmalz.pdf
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