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Measuring investors’ risk aversion in China’s stock market

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  • Bian, Timothy Yang
  • Wang, Tianyi
  • Zhou, Zipeng

Abstract

Our paper measures investors’ aversion to downside risk in China’s stock market by comparing two estimates of probability density functions for asset prices. The dynamics of the risk aversion indicator justifies the theoretical argument that the option-implied risk-neutral density incorporates information about investors’ risk preferences which is not captured in the historical data. Our risk aversion indicator sheds light on the investment timing of market practitioners: when the degree of risk aversion is particularly low but about to rise, there will be positive abnormal returns for most market sectors in the near future.

Suggested Citation

  • Bian, Timothy Yang & Wang, Tianyi & Zhou, Zipeng, 2021. "Measuring investors’ risk aversion in China’s stock market," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317050
    DOI: 10.1016/j.frl.2020.101891
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk-neutral density; Downside risk aversion; Option prices; Nonparametric estimation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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