Risk Aversion Spillover: Evidence from Financial Markets and Controlled Experiments

Abstract

We study risk aversion (RA) spillover from the US to several major developed economies. Using daily financial market and news data, we identify US RA events and show that the international pass-through of US high RA events is significantly higher (61%) than that of US low RA events (43%), capturing asymmetric spillover. We replicate these findings in controlled experiments where non-US subjects were primed with scenarios of US RA events. Our experimental evidence further shows that US RA events also generate asymmetric emotion changes, which can be linked to unfamiliarity and explains 20% of the RA spillover asymmetry.

Keywords: risk aversion, propagation, emotions, animal spirits, controlled experiment, VIX, variance risk premium, uncertainty, international comovement

JEL Classification: G1, G15, D91, C9