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Market risk aversion under volatility shifts: An experimental study

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  • Aragó, V.
  • Barreda-Tarrazona, I.
  • Breaban, A.
  • Matallín, J.C.
  • Salvador, E.

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.

Suggested Citation

  • Aragó, V. & Barreda-Tarrazona, I. & Breaban, A. & Matallín, J.C. & Salvador, E., 2022. "Market risk aversion under volatility shifts: An experimental study," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 552-568.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:552-568
    DOI: 10.1016/j.iref.2022.02.022
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    More about this item

    Keywords

    Experimental finance; Volatility shifts; Risk aversion; Investor behavior; Flight-to-safety;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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