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Perspective on behavioral finance, we take a new look at the characteristics of investors’ risk preference, building the D-GARCH-M model, DR-GARCH-M model, and GARCHC-M model to investigate their changes with states of gain and loss and values of return together with other time-varying characteristics of investors’ risk preference. Based on a full description of risk preference characteristic, we develop a GARCHCS-M model to study its effect on the return skewness. The top ten market value stock composite indexes from Global Stock Exchange in 2012 are adopted to make the empirical analysis. The results show that investors are risk aversion when they gain and risk seeking when they lose, which effectively explains the inconsistent risk-return relationship. Moreover, the degree of risk aversion rises with the increasing gain and that of risk seeking improves with the increasing losses. Meanwhile, we find that investors’ inherent risk preference in most countries displays risk seeking, and their current risk preference is influenced by last period’s risk preference and disturbances. At last, investors’ risk preferences affect the conditional skewness; specifically, their risk aversion makes return skewness reduce, while risk seeking makes the skewness increase.

Taking the stock market as a whole object, we assume that prior losses and gains are two different factors that can influence risk preference separately. The two factors are introduced as separate explanatory variables into the time-varying GARCH-M (TVRA-GARCH-M) model. Then, we redefine prior losses and gains by selecting different reference point to study investors' time-varying risk preference. The empirical evidence shows that investors' risk preference is time varying and is influenced by previous outcomes; the stock market as a whole exhibits house money effect; that is, prior gains can decrease investors' risk aversion while prior losses increase their risk aversion. Besides, different reference points selected by investors will cause different valuation of prior losses and gains, thus affecting investors' risk preference.

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