Time Varying Risk Aversion
NBER Working Paper No. 19284
We use a repeated survey of an Italian bank's clients to test whether investors' risk aversion increases following the 2008 financial crisis. We find that both a qualitative and a quantitative measure of risk aversion increases substantially after the crisis. After considering standard explanations, we investigate whether this increase might be an emotional response (fear) triggered by a scary experience. To show the plausibility of this conjecture, we conduct a lab experiment. We find that subjects who watched a horror movie have a certainty equivalent that is 27% lower than the ones who did not, supporting the fear-based explanation. Finally, we test the fear-based model with actual trading behavior and find consistent evidence.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
Document Object Identifier (DOI): 10.3386/w19284
Users who downloaded this paper also downloaded these: