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Risk perception in financial markets: On the flip side

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  • Bekiros, Stelios
  • Jlassi, Mouna
  • Naoui, Kamel
  • Uddin, Gazi Salah

Abstract

We propose an alternative approach to capture the asymmetric risk-return relationship in financial markets using affective cognitive analysis. Implied volatility is employed as a robust gauge of risk perception. Markets exhibit a dramatic increase in fear sentiment when extreme upper-quantile losses hit investors while conditional positive returns fuel exuberance. However, an inverse response is observed in Asian markets due to normative societal phenomena, such as herding. A cognitive paradigm provides with a better interpretation of contagion than classical leverage-feedback theories as risk perception evolves dynamically over time. Overall, the fear of losses is not the flip side of gains' exuberance.

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  • Bekiros, Stelios & Jlassi, Mouna & Naoui, Kamel & Uddin, Gazi Salah, 2018. "Risk perception in financial markets: On the flip side," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 184-206.
  • Handle: RePEc:eee:finana:v:57:y:2018:i:c:p:184-206
    DOI: 10.1016/j.irfa.2018.03.005
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    1. Naegels, Vanessa & D’Espallier, Bert & Mori, Neema, 2020. "Perceived problems with collateral: The value of informal networking," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 32-45.

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    More about this item

    Keywords

    Fear gauge; Affective reaction; Herding; Implied volatility; Behavioral bias;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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