Stock Market Expectations and Risk Aversion of Individual Investors

36 Pages Posted: 7 Feb 2014 Last revised: 3 Mar 2015

See all articles by Boram Lee

Boram Lee

University of Stirling - Accounting and Finance Division

Leonard Rosenthal

Bentley University - Department of Finance

Chris Veld

Monash University

Yulia V. Veld-Merkoulova

Monash University - Department of Finance; Financial Research Network (FIRN)

Date Written: March 2, 2015

Abstract

We study the relationship between stock market return expectations and risk aversion of individuals and test whether the joint effects arising from the interaction of these two variables affect investment decisions. Using data from the Dutch National Bank Household Survey, we find that risk aversion levels have significant and negative effects on stock market expectations. We identify significant and negative effects on stock market participation arising from the interaction between stock market expectations and risk aversion. These effects are in addition to a significant and positive impact from stock market return expectations as well as a significant and negative effect from risk aversion separately. However, once individuals participate in the stock market, their stock market expectations alone remain significant in determining their portfolio allocation decisions.

Keywords: Portfolio Allocation, Stock Market Expectation, Risk Aversion, Individual Investor

JEL Classification: G10, G11, G12

Suggested Citation

Lee, Boram and Rosenthal, Leonard and Veld, Chris and Veld-Merkoulova, Yulia V., Stock Market Expectations and Risk Aversion of Individual Investors (March 2, 2015). Available at SSRN: https://ssrn.com/abstract=2392227 or http://dx.doi.org/10.2139/ssrn.2392227

Boram Lee (Contact Author)

University of Stirling - Accounting and Finance Division ( email )

Stirling, Scotland FK9 4LA
United Kingdom
01786467343 (Phone)
017867308 (Fax)

HOME PAGE: http://rms.stir.ac.uk/converis-stirling/person/20792

Leonard Rosenthal

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

Yulia V. Veld-Merkoulova

Monash University - Department of Finance ( email )

Building H
Caulfield, Victoria 3145
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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