STOCK RETURNS, ASYMMETRIC VOLATILITY, RISK AVERSION, AND BUSINESS CYCLE: SOME NEW EVIDENCE |
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| Authors: | SEI-WAN KIM BONG-SOO LEE |
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| Affiliation: | Kim:;Assistant Professor, Department of Economics, Ewha Womans University, 120-750, Seoul, Korea, and Department of Economics, California State University—Fullerton, Fullerton, CA 92834-6848. Phone +82-2-3277-4467, Fax +82-2-3277-2783, E-mail
Lee:;Professor, Department of Finance, College of Business, Florida State University, Tallahassee, FL 32306-1110. Phone 1-850-644-4713, Fax 1-850-644-4225, E-mail |
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| Abstract: | We study how three interrelated phenomena—excess stock returns and risk relation, risk aversion, and asymmetric volatility movement—change over business cycles. Using an asymmetric generalized autoregressive conditional heteroskedasticity in mean model and a Markov switching model, we find that excess stock return increases and asymmetric volatility movement is weakened during boom periods. This suggests that investors become more risk-averse during boom periods (i.e., procyclical risk aversion), which we confirm using a calibration of a simple equilibrium model . ( JEL C32, E32, G12) |
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