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The Investors’ Implied Sentiment : A Robust Measure of Risk Appetite

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Author Info
Kim, KiHyung

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Abstract

The abundant empirical evidence disputes against the efficient market theory. Both academic researchers and market practitioners pay great attention to the `Investors’ Sentiment' or the `Risk Appetite', which is difficult to be explained in classical approach. Nevertheless the attention, the definite measure of the investors’ sentiment is not yet developed. The main purpose of this research is suggesting an index of investors’ sentiment in which the classical theory, the modern approach and the practical interest are in harmony. The index, which is named the ‘Implied Sentiment’, is based on the risk appetite index of the Bank of England and the approach of behavioral finance. The risk appetite index of the Bank of England is derived from the consumption capital asset pricing model. To implement the approach of behavioral finance, a conditional variance and conditional expectation is used to calculate the Implied Sentiment. Consequently, in the procedure of calculating the Implied Sentiment, no strong assumption is included. Through the empirical research of the Korean financial market, the author can sure that the Implied Sentiment is a valid measure of the investors’ sentiment.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5714.

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Date of creation: 07 Nov 2007
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Handle: RePEc:pra:mprapa:5714

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Related research
Keywords: investors’ sentiment risk appetite CCAPM stochastic discount factor

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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  1. Baker, Malcolm & Stein, Jeremy C., 2004. "Market liquidity as a sentiment indicator," Journal of Financial Markets, Elsevier, vol. 7(3), pages 271-299, June. [Downloadable!] (restricted)
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  2. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
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  3. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, 08. [Downloadable!] (restricted)
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  4. Prasanna Gai & Nicholas Vause, 2006. "Measuring Investors' Risk Appetite," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March. [Downloadable!]
  5. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  6. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51. [Downloadable!] (restricted)
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  8. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October. [Downloadable!] (restricted)
  9. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
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  10. Yacine Aït-Sahalia & Andrew W. Lo, 1998. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," Journal of Finance, American Finance Association, vol. 53(2), pages 499-547, 04. [Downloadable!] (restricted)
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  11. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March. [Downloadable!] (restricted)
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  12. 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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