Risk Aversion Propagation: Evidence from Financial Markets and Controlled Experiments

67 Pages Posted: 25 May 2021 Last revised: 6 Dec 2021

See all articles by Xing Huang

Xing Huang

Washington University in St. Louis - Olin Business School

Nancy R. Xu

Boston College, Carroll School of Management

Date Written: December 3, 2021

Abstract

We study risk aversion (RA) propagation from 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%), suggesting asymmetric US risk aversion propagation. In our lab experiment, non-US subjects when primed with a US financial bust shock exhibited asymmetrically more negative emotion and higher risk aversion. The foreign nature of bust shocks may change emotions more than that of boom shocks, which explains 20% of the RA propagation asymmetry in our experiment.

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

JEL Classification: G1, G15, D91, C9

Suggested Citation

Huang, Xing and Xu, Nancy R., Risk Aversion Propagation: Evidence from Financial Markets and Controlled Experiments (December 3, 2021). Available at SSRN: https://ssrn.com/abstract=3852463 or http://dx.doi.org/10.2139/ssrn.3852463

Xing Huang

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

Nancy R. Xu (Contact Author)

Boston College, Carroll School of Management ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://www.nancyxu.net

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
192
Abstract Views
846
rank
215,441
PlumX Metrics