Time Varying Risk Aversion

55 Pages Posted: 13 Aug 2013

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF); Einaudi Institute for Economics and Finance

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

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.

Keywords: Fear, Financial Crisis, Risk Aversion

JEL Classification: D1, D8, G11, G12

Suggested Citation

Guiso, Luigi and Guiso, Luigi and Sapienza, Paola and Zingales, Luigi, Time Varying Risk Aversion (August 2013). CEPR Discussion Paper No. DP9589, Available at SSRN: https://ssrn.com/abstract=2309233

Luigi Guiso (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

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HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Einaudi Institute for Economics and Finance ( email )

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rome, 00187
Italy

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance ( email )

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United States
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Luigi Zingales

University of Chicago - Booth School of Business ( email )

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773-702-3196 (Phone)
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National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Belgium

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