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)

ABBREVIATIONS

AGARCH: Asymmetric Generalized

Autoregressive Conditional

Heteroskedasticity

AGARCH-M: ...

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