Risk Aversion and Financial Crisis

Luigi Guiso

No 1412, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: It has long been recognized that variations in expected future cash flows are not enough to account for variations in asset prices. Variation in willingness to bear risk is also needed. Asset pricing theories have accordingly focused on models characterized by preferences that allow for time variation in risk aversion. But what drives this variation? How should preferences be characterized? Do risk attitudes of individuals evolve over time? And if so, what are the triggers of these variations? This chapter will discuss these issues, summarizing what we know about individual preferences for risk and motives for them to change over time. It will also provide some evidence on how these preferences changed during the financial crises.

Pages: 28 pages
Date: 2014, Revised 2014-12
New Economics Papers: this item is included in nep-upt
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