Who Should Buy Stocks When Volatility Spikes?
35 Pages Posted: 20 Apr 2017 Last revised: 29 Jul 2019
Date Written: June 28, 2019
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: Suggested Citation