Working Paper: NBER ID: w15333
Authors: Douglas W. Blackburn; William N. Goetzmann; Andrey D. Ukhov
Abstract: We use traded options on growth and value indices to test for clientele differences in risk preferences. Value investors appear to have exhibited a higher average level of risk aversion than growth investors for two different time periods in the late 1990's and early 2000's. We construct a model of time-varying clientele preferences that allows investors with different levels of risk-aversion to switch between investment styles conditional upon the evolution of returns and risk. The model makes predictions about the autocorrelations structure of measured risk parameters and also about the autocorrelation and cross-autocorrelation of fund flows by style. Empirical tests of the model provide evidence consistent with the existence of style switchers--investors who move funds between growth and value securities. We construct trading strategies in the value and growth index options markets that effectively buy risk from one clientele and sell it to another. These strategies generated modest positive returns over the period of study.
Keywords: Risk Aversion; Clientele Effects; Behavioral Finance; Investment Styles
JEL Codes: D01; G01; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment style (value indices) (G11) | risk aversion (D81) |
| risk preferences (value investors) (G11) | persistence of risk preferences (D81) |
| high past returns (G17) | attraction of switchers (C34) |
| high returns on a competing style (G11) | departure of switchers (J63) |
| relative performance of growth and value styles (G11) | investor behavior (G41) |
| estimated risk preferences (D81) | mutual fund flows (G23) |