The dynamic relationship among economic and monetary policy, geopolitical risk, sentiment, and risk aversion: A TVP-VAR approach

Sun-Yong Choi and Elroi Hadad

Finance Research Letters, 2025, vol. 72, issue C

Abstract: We study how external economic and market uncertainty factors affect investors’ risk aversion. Utilizing TVP-VAR framework, we examine the impact of economic policy uncertainty (EPU), monetary policy uncertainty (MPU), geopolitical risk (GPR), and investor sentiment (Sent) on the risk aversion index (RAI). Our analysis reveals that (i) EPU and MPU are primary transmitters of shocks, significantly influencing RAI; (ii) GPR has a minimal and temporary effect, while Sent exhibits limited influence; and (iii) the impact on risk aversion has lessened, indicating growing market resilience to policy-related shocks. These findings underscore the psychological impact of economic instability on investors’ risk aversion.

Keywords: Risk aversion; Economic uncertainty; Monetary uncertainty; Geopolitical risk; Investor sentiment; TVP-VAR (search for similar items in EconPapers)
JEL-codes: G12 G15 G41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324015617

DOI: 10.1016/j.frl.2024.106532

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