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Does risk aversion predict the future real economy?

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  • Kim, Jinhwan
  • Cho, Hoon
  • Ryu, Doojin

Abstract

This study evaluates the forecasting ability of various risk aversion measures for future U.S. real economic activity (REA). Recognizing that widely used proxies for risk aversion differ significantly in their construction and behavior, we assess their empirical validity using multiple criteria, including leading-indicator properties, counter-cyclicality, persistence, and volatility. We conduct both in-sample and out-of-sample forecasting exercises, along with subperiod analyses. While most measures exhibit strong in-sample performance, their out-of-sample accuracy varies with macroeconomic conditions. These results underscore the state-dependent nature of risk aversion and highlight its potential usefulness as a forward-looking indicator of real economic activity.

Suggested Citation

  • Kim, Jinhwan & Cho, Hoon & Ryu, Doojin, 2025. "Does risk aversion predict the future real economy?," Journal of International Money and Finance, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:jimfin:v:157:y:2025:i:c:s0261560625001275
    DOI: 10.1016/j.jimonfin.2025.103392
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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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