STOCK RETURNS, ASYMMETRIC VOLATILITY, RISK AVERSION, AND BUSINESS CYCLE: SOME NEW EVIDENCE

Seiwan Kim · Bong‐Soo Lee

49 citations0/0 files storedEconomic Inquiry

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

We study how three interrelated phenomena—excess stock returns and risk relation, risk aversion, and asymmetric volatility movement—change over business cycles. Using an asymmetric generalized autoregressive conditional heteroskedasticity in mean model and a Markov switching model, we find that excess stock return increases and asymmetric volatility movement is weakened during boom periods. This suggests that investors become more risk‐averse during boom periods (i.e., procyclical risk aversion), which we confirm using a calibration of a simple equilibrium model. (JEL C32, E32, G12)

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1993On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks 1973An Intertemporal Capital Asset Pricing Model 1978Asset Prices in an Exchange Economy 1992ARCH modeling in finance

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