Systematic risk, government policy intervention, and dynamic contrarian investments

Jiapeng Liu, Qizhi Tao, Wenxuan Hou and Ting Zhang

International Review of Economics & Finance, 2016, vol. 43, issue C, 334-343

Abstract: When systematic risk is high, or the market crashes, most risk-averse investors choose to exit the market; however, there are some contrarian investors who opt to make investments. We model such contrarian behaviors by incorporating investors' expectations of government policies into the conventional risk–return trade-off framework. We show that when policy risk is low and there is a high probability that the market will recover subsequent to government intervention, the optimal solution is for investors to make investments. However, when the policy risk is high and the market has a high probability of deteriorating, the optimal investment decision is to exit. Our simulation results are consistent with the model predictions.

Keywords: Contrarian investments; Policy expectations; Systematic risk; Optimal decisions (search for similar items in EconPapers)
JEL-codes: C13 G01 G11 G18 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:43:y:2016:i:c:p:334-343

DOI: 10.1016/j.iref.2015.12.006

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