Time-varying risk aversion and international stock returns

Massimo Guidolin, Erwin Hansen and Gabriel Cabrera

The North American Journal of Economics and Finance, 2025, vol. 75, issue PA

Abstract: We estimate aggregate, time-varying risk aversion inferred from options, stock returns and macroeconomic data for a panel of 8 countries. We document that, for most countries, the estimated risk aversion measure is counter-cyclical. Moreover, we show that estimated risk aversion forecasts monthly stock index returns up to 12 months ahead. This effect is statistically significant in panel regressions, and it survives the inclusion of additional control variables, such as an estimated of the variance risk premium, an investors’ sentiment index, and a measure of economic uncertainty. Finally, we show that risk aversion provides useful information to an investor who aims at timing the market. An investment strategy that uses the estimated time-varying risk aversion measure to solve a mean–variance asset allocation problem, delivers significantly positive returns.

Keywords: Implied risk aversion; Stock return predictions; Market timing; Mean–variance asset allocation (search for similar items in EconPapers)
JEL-codes: G10 G11 G15 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Time-Varying Risk Aversion and International Stock Returns (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:75:y:2025:i:pa:s1062940824001967

DOI: 10.1016/j.najef.2024.102271

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