The Asymmetric Relation between Time-Varying Risk Aversion and VIX Index

Abstract

This study derives the time-varying risk aversion and examines whether investors' risk aversion is asymmetric to the level and change of the Chicago Board Options Exchange (CBOE) Market Volatility Index (VIX). The empirical results on a daily basis indicate that risk aversion has an asymmetric relation with VIX level and change, which also holds during the period of financial crisis. However, the relation becomes less significant when the analysis is implemented on a monthly basis and disappears when the influence of macroeconomic variables are considered. Obviously, the formation of risk aversion depends on the economic condition.