Stock returns, asymmetric volatility, risk aversion, and business cycle: Some new evidence

We study how three interrelated phenomena - excess stock returns and risk relation, risk aversion, and asymmetric volatility movement - change over business cycles. Using an asymmetric generalized autoregressive conditional heteroskedasticity in mean model and a Markov switching model, we find that excess stock return increases and asymmetric volatility movement is weakened during boom periods. This suggests that investors become more risk-averse during boom periods (i.e., procyclical risk aversion), which we confirm using a calibration of a simple equilibrium model. (JEL C32, E32, G12)