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Investors’ risk aversion integration and quantitative easing

Athanasios Fassas (Department of Accounting and Finance, University of Thessaly, Volos, Greece)
Stephanos Papadamou (Department of Economics, University of Thessaly, Volos, Greece)
Dionisis Philippas (Department of Finance, GROUPE ESSCA Paris, Paris, France)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 21 August 2019

Issue publication date: 12 June 2020

Abstract

Purpose

The purpose of this paper is to examine the spillover effects in international financial markets related to investors’ risk aversion as proxied by the variance premium, and how these relationships were affected by the quantitative easing (QE) announcements by the Federal Reserve.

Design/methodology/approach

The empirical analysis employs a multivariate exponential generalized autoregressive conditionally heteroskedastic (VAR-EGARCH) specification, which includes the USA, the UK, Germany, France and Switzerland.

Findings

Two main findings are raised from the empirical analysis. First, the VAR-EGARCH model identifies statistically significant spillover effects identifying the USA as the leading source driving investors’ risk aversion. Second, unconventional monetary easing announcement by the Fed has had significant effects on investors’ risk perspectives.

Practical implications

Accounting for the dynamic volatility of variance premium inter-dependencies, the authors show that the correlations among variance premia increase during the QE announcements by the Federal Reserve, suggesting a herding behavior that may potentially lead to stock price bubbles and undermine financial stability.

Originality/value

This is an empirical attempt that investigates the unexplored effects of unconventional monetary policy decisions in relation with investors’ attitudes toward risk.

Keywords

Citation

Fassas, A., Papadamou, S. and Philippas, D. (2020), "Investors’ risk aversion integration and quantitative easing", Review of Behavioral Finance, Vol. 12 No. 2, pp. 170-183. https://doi.org/10.1108/RBF-02-2019-0027

Publisher

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Emerald Publishing Limited

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