We propose a model that addresses two fundamental challenges concerning the timing and pricing of uncertainty: established equilibrium asset pricing models require a controversial degree of preference for early resolution of uncertainty; and do not generate the downward-sloping term structure of risk premia suggested by the data. Inspired by experimental evidence, we construct dynamically inconsistent preferences in which risk aversion decreases with the temporal horizon. The resulting pricing model can generate a term structure of risk premia consistent with empirical evidence, without forcing a particular preference for resolution of uncertainty or compromising the ability to match standard moments.
risk aversion; early resolution; term structure; volatility risk;
- D03: Behavioral Microeconomics • Underlying Principles
- D90: General
- G12: Asset Pricing • Trading Volume • Bond Interest Rates