Three Essays on Time-Varying Risk Aversion and Investor Sentiment

Time-Varying Risk Aversion and the Profitability of Carry Trades: Evidence from the Cross-Quantilogram

Economies ◽

10.3390/economies8010018 ◽

2020 ◽

Vol 8 (1) ◽

pp. 18

Author(s):

Riza Demirer ◽

Rangan Gupta ◽

Hossein Hassani ◽

Xu Huang

Keyword(s):

Risk Aversion ◽

Predictive Power ◽

Investor Sentiment ◽

Time Varying ◽

Carry Trade ◽

Currency Markets ◽

High Quantiles ◽

Predictive Role ◽

The Cross ◽

Directional Predictability

This paper examines the predictive power of time-varying risk aversion over payoffs to the carry trade strategy via the cross-quantilogram methodology. Our analysis yields significant evidence of directional predictability from risk aversion to daily carry trade returns tracked by the Deutsche Bank G10 Currency Future Harvest Total Return Index. The predictive power of risk aversion is found to be stronger during periods of moderate to high risk aversion and largely concentrated on extreme fluctuations in carry trade returns. While large crashes in carry trade returns are associated with significant rises in investors’ risk aversion, we also found that booms in carry trade returns can be predicted at high quantiles of risk aversion. The results highlight the predictive role of extreme investor sentiment in currency markets and regime specific patterns in carry trade returns that can be captured via quantile-based predictive models.

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Risk Appetite and Jumps in Realized Correlation

Mathematics ◽

10.3390/math8122255 ◽

2020 ◽

Vol 8 (12) ◽

pp. 2255

Author(s):

Riza Demirer ◽

Konstantinos Gkillas ◽

Christos Kountzakis ◽

Amaryllis Mavragani

Keyword(s):

Risk Aversion ◽

Financial Markets ◽

Cash Flow ◽

Predictive Power ◽

Investor Sentiment ◽

Time Varying ◽

Risk Appetite ◽

Diversification Strategies ◽

Intraday Data

This paper examines the role of non-cash flow factors over correlation jumps in financial markets. Utilizing time-varying risk aversion measure as a proxy for investor sentiment and the cross-quantilogram method applied to intraday data, we show that risk aversion captures significant predictive power over realized stock-bond correlation jumps at different quantiles and lags. The predictive relation between correlation jumps and time-varying risk aversion is found to be asymmetric, as we detect a heterogeneous dependence pattern across different quantiles and lag orders. Our findings underline the importance of non-cash flow factors over correlation jumps, highlighting the role of behavioral factors in optimal portfolio allocations and the effectiveness of diversification strategies.

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