Skewness and market investors risk preferences

Risk preferences are generally measured with utility functions, which are subjective and usually restrict market agents to be risk averse. The current study investigates investors' preferences toward risk from the index price movement perspective. In a risk neutral market, future prices will increase or decrease with the same probability. However, if the market representative-agents are risk averse, the probabilities of future price increase and decrease will be different and can easily be detected through the conditional skewness. We investigated the risk preferences for the American and Japanese markets. Although the American S&P 500 index shows historical risk neutrality over the past 10 years, everyday movements show negative skewness and thus risk aversion; the Japanese Nikkei 225 has negative conditional skewness and thus Japanese investors are risk averse.