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Risk Aversion and Clientele Effects

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Author Info
Douglas W. Blackburn
William N. Goetzmann
Andrey D. Ukhov

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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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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
G01 - Financial Economics - - General - - - Financial Crises
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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This page was last updated on 2009-11-25.

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