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Stock market expectations and risk aversion of individual investors

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  • Lee, Boram
  • Rosenthal, Leonard
  • Veld, Chris
  • Veld-Merkoulova, Yulia

Abstract

We study the relationship between stock market return expectations and risk aversion of individuals and test whether the joint effects arising from the interaction of these two variables affect investment decisions. Using data from the Dutch National Bank Household Survey, we find that higher risk aversion is associated with lower stock market expectations. We identify significant and negative effects on the probability that individuals invest in stocks arising from the interaction between stock market expectations and risk aversion. These effects are in addition to a significant and positive impact from stock market return expectations as well as a significant and negative effect from risk aversion separately. However, once individuals participate in the stock market, their stock market expectations alone remain significant in determining their portfolio allocation decisions.

Suggested Citation

  • Lee, Boram & Rosenthal, Leonard & Veld, Chris & Veld-Merkoulova, Yulia, 2015. "Stock market expectations and risk aversion of individual investors," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 122-131.
    • Handle: RePEc:eee:finana:v:40:y:2015:i:c:p:122-131
    DOI: 10.1016/j.irfa.2015.05.011
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    More about this item

    Keywords

    Portfolio allocation; Stock market expectation; Risk aversion; Individual investor;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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