How much happiness can we find in the U.S. fear Index?

Abstract

Using high-frequency data for the S&P 500, we decompose the so-called fear index, the VIX, into two components: conditional variance of stock returns and variance risk premium, which proxies for risk aversion. We provide evidence about the relationship between investor mood and the implied risk aversion around joyful occasions such as holidays and other occasions that might result in negative moods such as the disruption of sleep resulting from the move to daylight savings time. We find that implied risk aversion shows a U-shape around holidays and a ∩-shape when investors are in a negative mood. Our results validate the existence of changes in the price of risk around non-economic events, and suggest that variance risk premium can be a good reflection of mood.