Does risk aversion predict the future real economy?

Jinhwan Kim, Hoon Cho and Doojin Ryu

Journal of International Money and Finance, 2025, vol. 157, issue C

Abstract: This study evaluates the forecasting ability of various risk aversion measures for future U.S. real economic activity (REA). Recognizing that widely used proxies for risk aversion differ significantly in their construction and behavior, we assess their empirical validity using multiple criteria, including leading-indicator properties, counter-cyclicality, persistence, and volatility. We conduct both in-sample and out-of-sample forecasting exercises, along with subperiod analyses. While most measures exhibit strong in-sample performance, their out-of-sample accuracy varies with macroeconomic conditions. These results underscore the state-dependent nature of risk aversion and highlight its potential usefulness as a forward-looking indicator of real economic activity.

Keywords: Predictor; Real business cycle; Real economic activity; Recession; Risk aversion (search for similar items in EconPapers)
JEL-codes: C33 E13 E32 E44 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:157:y:2025:i:c:s0261560625001275

DOI: 10.1016/j.jimonfin.2025.103392

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