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Risk Aversion and Clientele Effects

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  • Douglas W. Blackburn
  • William N. Goetzmann
  • Andrey D. Ukhov

Abstract

We use traded options on growth and value indices to test for clientele differences in risk preferences. Value investors appear to have exhibited a higher average level of risk aversion than growth investors for two different time periods in the late 1990’s and early 2000’s. We construct a model of time-varying clientele preferences that allows investors with different levels of risk-aversion to switch between investment styles conditional upon the evolution of returns and risk. The model makes predictions about the autocorrelations structure of measured risk parameters and also about the autocorrelation and cross-autocorrelation of fund flows by style. Empirical tests of the model provide evidence consistent with the existence of style switchers—investors who move funds between growth and value securities. We construct trading strategies in the value and growth index options markets that effectively buy risk from one clientele and sell it to another. These strategies generated modest positive returns over the period of study.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15333.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15333

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  1. Bliss, Robert R. & Panigirtzoglou, Nikolaos, 2002. "Testing the stability of implied probability density functions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(2-3), pages 381-422, March.
  2. Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 73, pages 530.
  3. Jakub W. Jurek & Luis M. Viceira, 2011. "Optimal Value and Growth Tilts in Long-Horizon Portfolios," Review of Finance, European Finance Association, European Finance Association, vol. 15(1), pages 29-74.
  4. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-51.
  5. Yacine Aït-Sahalia & Andrew W. Lo, 1998. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 53(2), pages 499-547, 04.
  6. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, Elsevier, vol. 94(1-2), pages 9-51.
  7. Joshua D. Coval, 2001. "Expected Option Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 56(3), pages 983-1009, 06.
  8. Barberis, Nicholas & Shleifer, Andrei, 2003. "Style investing," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(2), pages 161-199, May.
  9. Stewart Mayhew & Vassil Mihov, 2004. "How Do Exchanges Select Stocks for Option Listing?," Journal of Finance, American Finance Association, American Finance Association, vol. 59(1), pages 447-471, 02.
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