From Time Varying Risk-Aversion to Anomalies in Market Moments’ Risk Premia

42 Pages Posted: 24 Nov 2015

See all articles by Dennis Bams

Dennis Bams

Maastricht University - Department of Finance; Open University Heerlen

Iman Honarvar

Robeco Quantitative Investments

Thorsten Lehnert

University of Luxembourg

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

Bams, Dennis and Honarvar, Iman and Lehnert, Thorsten, From Time Varying Risk-Aversion to Anomalies in Market Moments’ Risk Premia (May 2015). Available at SSRN: https://ssrn.com/abstract=2692983 or http://dx.doi.org/10.2139/ssrn.2692983

Dennis Bams

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Open University Heerlen ( email )

Netherlands

Iman Honarvar (Contact Author)

Robeco Quantitative Investments ( email )

Rotterdam
Netherlands

Thorsten Lehnert

University of Luxembourg ( email )

6, rue Coudenhove-Kalergi
Luxembourg, L-1359
Luxembourg

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