Measuring Investors' Risk Appetite
AbstractThis 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 818.
Date of creation: 07 Dec 2005
Date of revision:
Publication status: Published in International Journal of Central Banking Number 1.Volume(2006): pp. 167-188
Risk appetite; market sentiment; risk-neutral pricing; risk aversion;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-25 (All new papers)
- NEP-RMG-2006-11-25 (Risk Management)
- NEP-UPT-2006-11-25 (Utility Models & Prospect Theory)
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