Time-Varying Linkages Between Survey-Based Financial Risk Tolerance and Stock Market Dynamics: Signal Decomposition and Regime-Switching Evidence

This study examines how aggregate financial risk tolerance (FRT), measured from repeated survey responses, co-evolves with stock-market dynamics over time. The observed FRT index is treated as a noisy preference signal containing both gradual drift and episodic deviations, and its market relevance is evaluated under time variation, frequency components, and stress regimes. Using monthly data that align the survey-based FRT index with market returns and risk measures, a three-part econometric design is implemented. First, a time-varying parameter VAR (TVP-VAR) characterizes bidirectional, non-constant linkages between FRT and market outcomes. Second, signal-extraction methods decompose FRT into a smooth “normal” component and a high-frequency “abnormal” component (with robustness to alternative filters) to test whether short-run deviations contain distinct information for volatility and downside risk. Third, a Markov-switching specification assesses state dependence by testing whether the FRT–market relationship differs between low-stress and high-stress regimes. Across specifications, the FRT–market linkage is strongly state dependent: the sign and magnitude of FRT effects drift over time and differ across regimes, with high-frequency FRT deviations aligning more closely with risk dynamics than the smooth component. Predictive validation is provided via out-of-sample forecasting of next-month market risk using elastic net and gradient boosting relative to an AR(1) benchmark; explainability analysis (SHAP) indicates that abnormal FRT contributes incremental predictive content beyond standard market-state variables. Overall, the framework offers a mathematically transparent approach to modeling survey-based preference signals in markets and supports regime-aware forecasting and risk-management applications.