Time Varying Risk Aversion
55 Pages Posted: 13 Aug 2013
There are 2 versions of this paper
Time Varying Risk Aversion
Date Written: August 2013
Abstract
We use a repeated survey of an Italian banks 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: Suggested Citation