Risk Aversion Spillover : Evidence from Financial Markets and Controlled Experiments

We study risk aversion (RA) spillover from US to several major developed economies. Using daily financial market and news data, we identify US RA events and show that the international pass-through of US high RA events is significantly higher (61%) than that of US low RA events (43%), suggesting asymmetric US risk aversion spillover. In our lab experiment, non-US subjects when primed with a US financial bust shock exhibited asymmetrically more negative and less positive emotions, and higher risk aversion. The foreign nature of bust shocks may change emotions more than that of boom shocks, which explains 20% of the RA spillover asymmetry in our experiment