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The dynamic relationship among economic and monetary policy, geopolitical risk, sentiment, and risk aversion: A TVP-VAR approach

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  • Choi, Sun-Yong
  • Hadad, Elroi

Abstract

We study how external economic and market uncertainty factors affect investors’ risk aversion. Utilizing TVP-VAR framework, we examine the impact of economic policy uncertainty (EPU), monetary policy uncertainty (MPU), geopolitical risk (GPR), and investor sentiment (Sent) on the risk aversion index (RAI). Our analysis reveals that (i) EPU and MPU are primary transmitters of shocks, significantly influencing RAI; (ii) GPR has a minimal and temporary effect, while Sent exhibits limited influence; and (iii) the impact on risk aversion has lessened, indicating growing market resilience to policy-related shocks. These findings underscore the psychological impact of economic instability on investors’ risk aversion.

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  • Choi, Sun-Yong & Hadad, Elroi, 2025. "The dynamic relationship among economic and monetary policy, geopolitical risk, sentiment, and risk aversion: A TVP-VAR approach," Finance Research Letters, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324015617
    DOI: 10.1016/j.frl.2024.106532
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    Keywords

    Risk aversion; Economic uncertainty; Monetary uncertainty; Geopolitical risk; Investor sentiment; TVP-VAR;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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