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Benchmark Index of Risk Appetite

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Author Info
Miroslav Misina

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Abstract

Changes in investors' risk appetite have been used to explain a variety of phenomena in asset markets. And yet, popular indicators of changes in risk appetite typically have scant foundation in theory, and give contradictory signals in practice. The question is which popular indicator, if any, captures these changes. Kumar and Persaud (2002) offer an intuitively appealing argument regarding the effects of changes in risk appetite on asset prices in a portfolio, and Misina (2003) establishes the conditions under which these effects will be present. The author proposes a method that empirically implements these conditions and thus ensures that the resulting index can identify changes in risk appetite in the data. This index is then used to assess other risk appetite indexes used in practice. An example illustrates how the index can be used to help interpret price movements in foreign exchange markets.

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File URL: http://www.bankofcanada.ca/en/res/wp/2006/wp06-16.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 06-16.

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Length: 30 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-16

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Web page: http://www.bank-banque-canada.ca/

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Related research
Keywords: Economic models; Financial markets;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Miroslav Misina, 2003. "What Does the Risk-Appetite Index Measure?," Working Papers 03-23, Bank of Canada. [Downloadable!]
  2. Kumar, Manmohan S & Persaud, Avinash, 2002. "Pure Contagion and Investors' Shifting Risk Appetite: Analytical Issues and Empirical Evidence," International Finance, Blackwell Publishing, vol. 5(3), pages 401-36, Winter. [Downloadable!] (restricted)
  3. Kenneth A. Froot & Paul G. J. O'Connell, 2003. "The Risk Tolerance of International Investors," NBER Working Papers 10157, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcello Pericoli & Massimo Sbracia, 2006. "The CAPM and the risk appetite index; theoretical differences and empirical similarities," Temi di discussione (Economic working papers) 586, Bank of Italy, Economic Research Department. [Downloadable!]
Statistics
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This page was last updated on 2009-11-24.

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