Market risk aversion under volatility shifts: An experimental study

Vicente  Aragó; Ivan Barreda-Tarrazona; Adriana Breaban; Juan Carlos  Matallín; Enrique  Salvador

doi:10.1016/j.iref.2022.02.022

Market risk aversion under volatility shifts: An experimental study

Vicente Aragó ^*, Ivan Barreda-Tarrazona, Adriana Breaban, Juan Carlos Matallín , Enrique Salvador

^*Corresponding author for this work

Business Economics

Research output: Contribution to journal › Article › Academic › peer-review

6 Citations (Scopus)

Abstract

We propose an experiment to analyze the relationship between volatility regimes and investors’ behavior and explore the mechanism by which aggregated risk aversion is configured. We design a market in which the volatility of the fundamentals is controlled and exogenously manipulated. Then we analyze the participation and trading behavior of participants under different volatility states. We observe a decrease in the market risk aversion during high volatility periods. In these periods, relatively more risk-averse investors do not participate in the risky market while less risk-averse investors trade. The individual risk aversion level of agents does not change during the experiment which leads us to conclude that the changes in market risk aversion during high volatility periods are mainly due to a participation effect.

Original language	English
Pages (from-to)	552-568
Number of pages	17
Journal	International Review of Economics and Finance
Volume	80
DOIs	https://doi.org/10.1016/j.iref.2022.02.022
Publication status	Published - Jul 2022

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© 2022 Elsevier Inc.

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title = "Market risk aversion under volatility shifts: An experimental study",

abstract = "We propose an experiment to analyze the relationship between volatility regimes and investors{\textquoteright} behavior and explore the mechanism by which aggregated risk aversion is configured. We design a market in which the volatility of the fundamentals is controlled and exogenously manipulated. Then we analyze the participation and trading behavior of participants under different volatility states. We observe a decrease in the market risk aversion during high volatility periods. In these periods, relatively more risk-averse investors do not participate in the risky market while less risk-averse investors trade. The individual risk aversion level of agents does not change during the experiment which leads us to conclude that the changes in market risk aversion during high volatility periods are mainly due to a participation effect.",

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AU - Barreda-Tarrazona, Ivan

AU - Breaban, Adriana

AU - Matallín , Juan Carlos

AU - Salvador, Enrique

PY - 2022/7

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AB - We propose an experiment to analyze the relationship between volatility regimes and investors’ behavior and explore the mechanism by which aggregated risk aversion is configured. We design a market in which the volatility of the fundamentals is controlled and exogenously manipulated. Then we analyze the participation and trading behavior of participants under different volatility states. We observe a decrease in the market risk aversion during high volatility periods. In these periods, relatively more risk-averse investors do not participate in the risky market while less risk-averse investors trade. The individual risk aversion level of agents does not change during the experiment which leads us to conclude that the changes in market risk aversion during high volatility periods are mainly due to a participation effect.

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VL - 80

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EP - 568

JO - International Review of Economics and Finance

JF - International Review of Economics and Finance

ER -

Market risk aversion under volatility shifts: An experimental study

Abstract

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