From Time Varying Risk-Aversion to Anomalies in Market Moments’ Risk Premia
42 Pages Posted: 24 Nov 2015
Date Written: May 2015
Abstract
Previous studies on the cross-sectional market moments’ risk premia find significantly negative risk premia for the market volatility and the market skewness risks and a positive premium for the market kurtosis risk. However, a significantly negative price of risk for the market skewness and a positive price of risk for the market kurtosis move against the ICAPM intuition. We refer to these counter-intuitive prices of risk as the anomalies in the market moments’ risk premia, and show that these anomalies only exist in low risk-aversion periods. Once investors’ risk-aversion rise, these anomalies vanish. Moreover, we find that Baker and Wurgler’s (2006) index of investor sentiment is strongly negatively affected by the past realizations in investor risk-aversion. Consequently, our empirical results can also be replicated by analyzing periods of high and low sentiment, separately.
Keywords: Time-varying Risk-aversion, Market Moments’ Risk Premia, Investor Sentiment Index, Intertemporal Capital Asset Pricing Model, Volatility Risk, Skewness Risk, Kurtosis Risk, Cross-Section of Expected Returns
JEL Classification: G12
Suggested Citation: Suggested Citation