The international linkages of market risk perception

This article studies the international linkages of market risk perception, which embeds a statistical measure of risk as well as the subjective beliefs and preferences of the representative investor. We find high commonality between the risk perception of different countries/economic areas, with a first principal component explaining more than 80% of the total variability. The level of integration is dynamic, peaking during crises. A connectedness analysis shows that the transmission of shocks goes from Western to Asia-Pacific economies. We also disentangle whether risk perception spillovers are due to shocks in the aggregate risk aversion or a resolution of uncertainty. A local projection analysis documents a short-term impact of risk aversion in the perception of risk. Uncertainty is also statistically significant, and although their effects are milder they span for longer periods.

The international linkages of market risk perception Articles