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Stock Returns, Asymmetric Volatility, Risk Aversion, And Business Cycle: Some New Evidence

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  • SEI‐WAN KIM
  • BONG‐SOO LEE

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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  • Sei‐Wan Kim & Bong‐Soo Lee, 2008. "Stock Returns, Asymmetric Volatility, Risk Aversion, And Business Cycle: Some New Evidence," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 131-148, April.
    • Handle: RePEc:bla:ecinqu:v:46:y:2008:i:2:p:131-148
    DOI: 10.1111/j.1465-7295.2007.00066.x
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    9. Cotter, John & Salvador, Enrique, 2022. "The non-linear trade-off between return and risk and its determinants," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 100-132.
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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