Market risk aversion under volatility shifts: An experimental study

V. Aragó, Iván Barreda-Tarrazona (), A. Breaban, J.C. Matallín and E. Salvador

International Review of Economics & Finance, 2022, vol. 80, issue C, 552-568

Abstract: We propose an experiment to analyze the relationship between volatility regimes and investors’ behavior and explore the mechanism by which aggregated risk aversion is configured. We design a market in which the volatility of the fundamentals is controlled and exogenously manipulated. Then we analyze the participation and trading behavior of participants under different volatility states. We observe a decrease in the market risk aversion during high volatility periods. In these periods, relatively more risk-averse investors do not participate in the risky market while less risk-averse investors trade. The individual risk aversion level of agents does not change during the experiment which leads us to conclude that the changes in market risk aversion during high volatility periods are mainly due to a participation effect.

Keywords: Experimental finance; Volatility shifts; Risk aversion; Investor behavior; Flight-to-safety (search for similar items in EconPapers)
JEL-codes: C92 G02 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:80:y:2022:i:c:p:552-568

DOI: 10.1016/j.iref.2022.02.022

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