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From Time Varying Risk-Aversion to Anomalies in Market Moments' Risk Premia

From Time Varying Risk-Aversion to Anomalies in Market Moments' Risk Premia PDF Author: Dennis Bams
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Languages : en
Pages : 42

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Book Description
Previous studies on the cross-sectional market moments' risk premia find significantly negative risk premia for the market volatility and the market skewness risks and a positive premium for the market kurtosis risk. However, a significantly negative price of risk for the market skewness and a positive price of risk for the market kurtosis move against the ICAPM intuition. We refer to these counter-intuitive prices of risk as the anomalies in the market moments' risk premia, and show that these anomalies only exist in low risk-aversion periods. Once investors' risk-aversion rise, these anomalies vanish. Moreover, we find that Baker and Wurgler's (2006) index of investor sentiment is strongly negatively affected by the past realizations in investor risk-aversion. Consequently, our empirical results can also be replicated by analyzing periods of high and low sentiment, separately.