Ori Levy

Mood-induced variation in risk preferences

Abstract Psychological research links good (bad) mood with increased (decreased) risk aversion. This relation has been widely documented in experimental setups. There has not been, however, a complementary analysis with real-life decisions data. This paper fills this gap by testing the relation between mood and risk attitude in capital markets. To shed light on that relation, we recover risk preferences from capital market data and employ accumulated evidence suggesting that people’s mood is correlated with weather conditions. Corroborating established experimental evidence, we find that good (bad) mood is associated with investors being less (more) willing to tolerate risk.

Mood and Judgment of Subjective Probabilities: Evidence from the U.S. Index Option Market

Numerous psychological studies show that weather conditions affect peoples mood and that mood states are correlated with peoples subjective evaluation of future probabilities. In this paper, a new approach is developed and asset market data are employed to test the mood-subjective probability relation. Cloud cover and precipitation volume serve as two mood proxies. Our statistical analysis suggests that bad mood states are characterized by investors placing higher probabilities on adverse events. JEL classification codes: D81.

Risk Preferences Heterogeneity: Evidence from Asset Markets

Using asset market data, as well as theoretical relations between investors’ preferences, option-implied, risk-neutral, probability distribution functions (PDFs,) and index-implied, actual, PDFs, this paper extracts a time-series of investors’ relative risk aversion (RRA) functions. Based on results recently derived by Benninga and Mayshar (2000), these functions are used to recover the evolution of risk preferences heterogeneity. Applying non-parametric estimation on European call options written on the S & P500 index, we find that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferences heterogeneity series is positively correlated in a static, as well as a dynamic, setup with a prevalent proxy for investors heterogeneity, namely, the spread between auction- and market-yields of Treasury bills. JEL classification: D81, G12, G13.