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Time-Varying Risk Aversion during World War II: Evidence from Belgian Lottery Bond Prices

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  • Matthieu Gilson
  • Kim Oosterlinck
  • Andrey Ukhov

Abstract

Although of paramount importance in finance, empirical evidence on time-varying risk aversion remains mixed. This paper contributes to the existing literature by analyzing how investors’ risk preferences change under extreme circumstances. Using the market prices of a Belgian lottery bond, we build an index that tracks the attitude toward risk of financial markets’ participants during the Second World War. Results show that risk aversion dramatically changed during the Occupation period. Before 1943, investors showed strong signs of risk aversion; yet, in 1943 and 1944, they exhibited a risk-seeking attitude. After 1943, investors agreed to pay more and more for the lottery feature, and much more than the lottery’s expected payoff. In line with the behavioral finance literature, this puzzling result is attributed to psychological factors, most importantly the euphoria brought by the prospect of the war’s end.

Suggested Citation

  • Matthieu Gilson & Kim Oosterlinck & Andrey Ukhov, 2015. "Time-Varying Risk Aversion during World War II: Evidence from Belgian Lottery Bond Prices," Working Papers CEB 15-031, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/207702
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