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Risk perception in financial markets: On the flip side

Stelios Bekiros, Mouna Jlassi, Kamel Naoui () and Gazi Uddin ()

International Review of Financial Analysis, 2018, vol. 57, issue C, 184-206

Abstract: 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)
Date: 2018
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DOI: 10.1016/j.irfa.2018.03.005

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