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Measuring Investors' Risk Appetite

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  • Prasanna Gai

    (Bank of England)

  • Nicholas Vause

    (Bank of England)

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    Abstract

    This paper proposes a method for measuring investor risk appetite based on the variation in the ratio of risk-neutral to subjective probabilities used by investors in evaluating possible future returns to an asset. Unlike other indicators advanced in the literature, our measure of market sentiment distinguishes risk appetite from risk aversion, and is reported in levels rather than changes. Implementation of the approach yields results that respond to crises and other major economic events in a plausible manner.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 2 (2006)
    Issue (Month): 1 (March)
    Pages:

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    Handle: RePEc:ijc:ijcjou:y:2006:q:1:a:5

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    Web page: http://www.ijcb.org/

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    Cited by:
    1. Virginie Coudert & Mathieu Gex, 2007. "Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of Empirical Indicators," Working Papers 2007-02, CEPII research center.
    2. Marini, Fran├žois, 2011. "Financial intermediation in the theory of the risk-free rate," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1663-1668, July.
    3. Jose Fique & Frank Page, 2013. "Rollover risk and endogenous network dynamics," Computational Management Science, Springer, vol. 10(2), pages 213-230, June.
    4. Ronald U. Mendoza, 2007. "A Compendium of Policy Instruments to Enhance Financial Stability and Debt Management in Emerging Market Economies," Working Papers 48, United Nations, Department of Economics and Social Affairs.
    5. Laurence Fung & Chi-sang Tam & Ip-wing Yu, 2008. "Changes in Investors' Risk Appetite - An Assessment of Financial Integration and Interdependence," Working Papers 0812, Hong Kong Monetary Authority.
    6. Ingo Fender & Martin Scheicher, 2008. "The ABX: how do the markets price subprime mortgage risk?," BIS Quarterly Review, Bank for International Settlements, September.

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