The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data

We propose a dynamic, forward-looking hedging strategy to manage stock market risks via positions in REITs, conditional on the level of risk aversion. Our findings show that REITs do not only offer significant risk reduction for passive portfolios, but also offer much improved risk-adjusted returns with the greatest benefits observed for Australia, Canada and the U.S. Overall, our findings suggest that time-varying risk aversion can be utilized to (i) establish effective hedges against stock market risks via positions in REITS, and (ii) improve the risk-return profile of passive portfolios.

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Investors’ Risk Preference Characteristics Based on Different Reference Point

Discrete Dynamics in Nature and Society ◽

10.1155/2014/158386 ◽

2014 ◽

Vol 2014 ◽

pp. 1-9 ◽

Cited By ~ 31

Author(s):

Fenghua Wen ◽

Zhifang He ◽

Xu Gong ◽

Aiming Liu

Keyword(s):

Stock Market ◽

Risk Aversion ◽

Empirical Evidence ◽

Reference Point ◽

Risk Preference ◽

Reference Points ◽

Time Varying ◽

Explanatory Variables ◽

House Money Effect ◽

Two Factors

Taking the stock market as a whole object, we assume that prior losses and gains are two different factors that can influence risk preference separately. The two factors are introduced as separate explanatory variables into the time-varying GARCH-M (TVRA-GARCH-M) model. Then, we redefine prior losses and gains by selecting different reference point to study investors’ time-varying risk preference. The empirical evidence shows that investors’ risk preference is time varying and is influenced by previous outcomes; the stock market as a whole exhibits house money effect; that is, prior gains can decrease investors’ risk aversion while prior losses increase their risk aversion. Besides, different reference points selected by investors will cause different valuation of prior losses and gains, thus affecting investors’ risk preference.

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Time-varying risk aversion and the profitability of momentum trades

Applied Finance Letters ◽

10.24135/afl.v9i0.193 ◽

2020 ◽

Vol 9 ◽

pp. 43-54 ◽

Cited By ~ 1

Author(s):

Riza Demirer ◽

Shrikant Jategaonkar

Keyword(s):

Stock Market ◽

Risk Aversion ◽

Predictive Power ◽

Market Volatility ◽

Time Varying ◽

Momentum Strategies ◽

Degree Of Risk ◽

The U.S

We show that time-varying risk aversion serves as a significant predictor of stock market momentum in the U.S. and globally. Risk aversion is found to be a robust predictor of momentum returns even after controlling for various well established stock market predictors and absorbs the predictive power of market volatility. The findings imply that momentum strategies can be enhanced by conditioning trades on the degree of risk aversion in the marketplace.

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