Measuring investors' risk appetite
AbstractThis paper proposes a new method for measuring investor 'risk appetite'. Like other indicators in the literature, it is based on a comparison of risk-neutral probabilities of future returns with the corresponding subjective probabilities. The precise nature of the comparison is novel, however, and involves comparing probabilities across the full range of potential returns. Unlike other indicators, 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 InfoPaper provided by Bank of England in its series Bank of England working papers with number 283.
Date of creation: Nov 2005
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-FMK-2006-09-30 (Financial Markets)
- NEP-RMG-2006-09-30 (Risk Management)
- NEP-UPT-2006-09-30 (Utility Models & Prospect Theory)
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