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Global Risk Aversion Spillover Dynamics and Investors' Attention Allocation

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  • Ceylan, Özcan

Abstract

This paper investigates market-wide risk aversion in an international setting. Particularly, this empirical study evaluates risk aversion spillover dynamics as an uncertainty transmission mechanism for the period 2000-2015 to reveal if there has been a significant change in these dynamics when markets are going through turbulent periods. As a plausible proxy for risk aversion, variance risk premium (VRP) is computed through the difference between expected variances under risk-neutral and physical measures for seven markets studied: United States, United Kingdom, Germany, France, Netherlands, Switzerland and Japan. Effects of a shock to U.S. VRP on the other markets' VRPs are evaluated through Generalized Forecast Error Variance Decomposition. Results show that risk aversion spillovers from U.S. to other markets are stronger while the U.S. is going through turbulent periods confirming the intuition that investors are more focused on incidents in the turbulent market. Markets become more connected in terms of sentiments when a country is unexpectedly hit by a major crisis, limiting diversification opportunities.

Suggested Citation

  • Ceylan, Özcan, 2016. "Global Risk Aversion Spillover Dynamics and Investors' Attention Allocation," MPRA Paper 71320, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:71320
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    Cited by:

    1. Ceylan, Özcan, 2021. "Time-varying risk aversion and its macroeconomic and financial determinants - A comparative analysis in the U.S. and French financial markets," Finance Research Letters, Elsevier, vol. 41(C).
    2. Gong, Jue & Wang, Gang-Jin & Zhou, Yang & Zhu, You & Xie, Chi & Foglia, Matteo, 2023. "Spreading of cross-market volatility information: Evidence from multiplex network analysis of volatility spillovers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    3. Zaremba, Adam, 2019. "Cross-sectional seasonalities in international government bond returns," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 80-94.

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    More about this item

    Keywords

    Investor sentiment; Risk aversion spillovers; Variance risk premium; Generalized forecast error variance decomposition; Investors' attention allocation; Financial crises.;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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