Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals
American Economic Review
vol. 105,
no. 2, February 2015
(pp. 860-85)
Abstract
Countercyclical risk aversion can explain major puzzles such as the high volatility of asset prices. Evidence for its existence is, however, scarce because of the host of factors that simultaneously change during financial cycles. We circumvent these problems by priming financial professionals with either a boom or a bust scenario. Subjects primed with a financial bust were substantially more fearful and risk averse than those primed with a boom, suggesting that fear may play an important role in countercyclical risk aversion. The mechanism described here is relevant for theory and may explain self-reinforcing processes that amplify market dynamics. (JEL E32, E44, G01, G11, G12)Citation
Cohn, Alain, Jan Engelmann, Ernst Fehr, and Michel André Maréchal. 2015. "Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals." American Economic Review, 105 (2): 860-85. DOI: 10.1257/aer.20131314Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates