Who Should Buy Stocks When Volatility Spikes?

35 Pages Posted: 20 Apr 2017 Last revised: 29 Jul 2019

See all articles by Andrés Schneider

Andrés Schneider

Board of Governors of the Federal Reserve System

Date Written: June 28, 2019

Abstract

I find that when volatility spikes, patient and more risk-averse investors should increase their exposure to stocks whereas impatient and less risk-averse investors should decrease it. This is because investors with a greater willingness to bear risk choose a larger exposure to risky assets on average, so volatility shocks affect their wealth relatively more. In general equilibrium, the deterioration of impatient and less risk-averse investors' wealth implies their ability to hold risky assets gets impaired, and thus they sell their positions to patient and more risk-averse investors at lower prices and higher expected excess returns.

Keywords: Stochastic Volatility, General Equilibrium, Heterogeneous Investors

JEL Classification: G11, G12, E21, E44

Suggested Citation

Schneider, Andrés, Who Should Buy Stocks When Volatility Spikes? (June 28, 2019). Available at SSRN: https://ssrn.com/abstract=2954831 or http://dx.doi.org/10.2139/ssrn.2954831

Andrés Schneider (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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