Risk perception in financial markets: On the flip side
Kamel Naoui () and
Gazi Uddin ()
International Review of Financial Analysis, 2018, vol. 57, issue C, 184-206
We propose an alternative approach to capture the asymmetric risk-return relationship in financial markets using affective cognitive analysis. Implied volatility is employed as a robust gauge of risk perception. Markets exhibit a dramatic increase in fear sentiment when extreme upper-quantile losses hit investors while conditional positive returns fuel exuberance. However, an inverse response is observed in Asian markets due to normative societal phenomena, such as herding. A cognitive paradigm provides with a better interpretation of contagion than classical leverage-feedback theories as risk perception evolves dynamically over time. Overall, the fear of losses is not the flip side of gains' exuberance.
Keywords: Fear gauge; Affective reaction; Herding; Implied volatility; Behavioral bias (search for similar items in EconPapers)
JEL-codes: G1 G14 G15 C5 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:57:y:2018:i:c:p:184-206
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