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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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    3. Huirong Liu, 2020. "Housing Investment, Stock Market Participation and Household Portfolio choice: Evidence from China's Urban Areas," Papers 2001.01641, arXiv.org.
    4. Zygimantas Mauricas & Valdone Darskuviene & Tamara Marinicevaite, 2017. "Stock Market Participation Puzzle In Emerging Economies: The Case Of Lithuania," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 8(2).
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    9. Zhang, Qian & Li, Zeguang, 2021. "Time-varying risk attitude and the foreign exchange market behavior," Research in International Business and Finance, Elsevier, vol. 57(C).
    10. Saúl Rick Fernández Hurtado & Diego Castillo Triana & Luz Ángela Martínez Martínez, 2018. "Clúster virtual: nueva alternativa a la competitividad eficaz en las empresas," REVISTA TENDENCIAS, Universidad de Nariño, vol. 19(1), pages 164-186, July.
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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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