Measuring investors’ risk aversion in China’s stock market

Timothy Yang Bian, Tianyi Wang () and Zipeng Zhou

Finance Research Letters, 2021, vol. 42, issue C

Abstract: Our paper measures investors’ aversion to downside risk in China’s stock market by comparing two estimates of probability density functions for asset prices. The dynamics of the risk aversion indicator justifies the theoretical argument that the option-implied risk-neutral density incorporates information about investors’ risk preferences which is not captured in the historical data. Our risk aversion indicator sheds light on the investment timing of market practitioners: when the degree of risk aversion is particularly low but about to rise, there will be positive abnormal returns for most market sectors in the near future.

Keywords: Risk-neutral density; Downside risk aversion; Option prices; Nonparametric estimation (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317050

DOI: 10.1016/j.frl.2020.101891

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