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What does the risk-appetite index measure?

Author

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  • Miroslav Misina

    (Bank of Canada)

Abstract

Explanations of changes in asset prices as being due to exogenous changes in risk appetite assume that changes in asset prices due to changes in risk aversion can be uniquely identified, and that some quantitative measure can capture these in isolation. One such measure, the risk-appetite index, is based on the rank correlation between assets' riskiness and excess returns. The author seeks to provide a theoretical foundation for this measure. The arguments behind the index are given in two propositions and these are derived within a class of well-specified asset-pricing models. His results indicate that, whereas the exclusive attribution of the rank effect to changes in risk aversion is problematic in general, a specific set of circumstances can be identified in which this attribution is permissible. The key assumption is identified, and its empirical implications are examined.

Suggested Citation

  • Miroslav Misina, 2003. "What does the risk-appetite index measure?," Economics Bulletin, AccessEcon, vol. 28(6), pages 1-6.
    • Handle: RePEc:ebl:ecbull:eb-03aa0006
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    References listed on IDEAS

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    1. Danthine, Jean-Pierre & Donaldson, John B. & Giannikos, Christos & Guirguis, Hany, 2004. "On the consequences of state dependent preferences for the pricing of financial assets," Finance Research Letters, Elsevier, vol. 1(3), pages 143-153, September.
    2. Kumar, Manmohan S & Persaud, Avinash, 2002. "Pure Contagion and Investors' Shifting Risk Appetite: Analytical Issues and Empirical Evidence," International Finance, Wiley Blackwell, vol. 5(3), pages 401-436, Winter.
    3. Manmohan S. Kumar & Avinash Persaud, 2002. "Pure Contagion and Investors’ Shifting Risk Appetite: Analytical Issues and Empirical Evidence," International Finance, Wiley Blackwell, vol. 5(3), pages 401-436, November.
    4. Miroslav Misina, 2003. "Are Distorted Beliefs Too Good to be True?," Staff Working Papers 03-4, Bank of Canada.
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    Cited by:

    1. Daniel O. Beltran & Deepa Dhume Datta & Thiago Revil T. Ferreira & Matteo Iacoviello & Mohammad Jahan-Parvar & Canlin Li & Juan M. Londono & Marius del Giudice Rodriguez & John H. Rogers & Bo Sun, 2017. "Taxonomy of Global Risk, Uncertainty, and Volatility Measures," International Finance Discussion Papers 1216, Board of Governors of the Federal Reserve System (U.S.).
    2. Kristin J. Forbes & Francis E. Warnock, 2012. "Capital Debt -and Equity-Led Capital Flow Episodes," Working Papers Central Bank of Chile 676, Central Bank of Chile.
    3. Marcello Pericoli & Massimo Sbracia, 2009. "Capital Asset Pricing Model and the Risk Appetite Index: Theoretical Differences, Empirical Similarities and Implementation Problems," International Finance, Wiley Blackwell, vol. 12(2), pages 123-150, August.
    4. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    5. Monica Billio & Bertrand Maillet & Loriana Pelizzon, 2022. "A meta-measure of performance related to both investors and investments characteristics," Annals of Operations Research, Springer, vol. 313(2), pages 1405-1447, June.
    6. Julien Chevallier & Mathieu Gatumel & Florian Ielpo, 2014. "Commodity markets through the business cycle," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1597-1618, September.
    7. Prasanna Gai & Nicholas Vause, 2006. "Measuring Investors' Risk Appetite," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
    8. Jinhui Luo & Philip Saks & Steve Satchell, 2009. "Implementing risk appetite in the management of currency portfolios," Journal of Asset Management, Palgrave Macmillan, vol. 9(6), pages 380-397, February.
    9. Miroslav Misina, 2006. "Benchmark Index of Risk Appetite," Staff Working Papers 06-16, Bank of Canada.
    10. Coudert, Virginie & Gex, Mathieu, 2008. "Does risk aversion drive financial crises? Testing the predictive power of empirical indicators," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 167-184, March.
    11. 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 and International Relations Area.
    12. Miroslav Misina, 2008. "Changing investors' risk appetite: Reality or fiction?," The European Journal of Finance, Taylor & Francis Journals, vol. 14(6), pages 489-501.
    13. Birgit Uhlenbrock, 2009. "Financial markets' appetite for risk - and the challenge of assessing its evolution by risk appetite indicators," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring financial innovation and its impact", Basel, 26-27 August 2008, volume 31, pages 221-259, Bank for International Settlements.
    14. Otilia MANTA, 2018. "Trends In The Concept Of The Financial Market In The Current Context Of Globalization," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 3(4), pages 114-124.
    15. Manolescu, Gheorghe, 2011. "Appetite For Risk Of The Bank (I)," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 15(2), pages 209-223.
    16. Kristin J. Forbes & Francis E. Warnock, 2014. "Debt-and Equity-Led Capital Flow Episodes," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 9, pages 291-322, Central Bank of Chile.
    17. Tomas Adam & Sona Benecka & Jakub Mateju, 2014. "Risk Aversion, Financial Stress and Their Non-Linear Impact on Exchange Rates," Working Papers 2014/07, Czech National Bank.
    18. Ms. Brenda Gonzalez-Hermosillo & Mr. Vance Martin & Mr. Mardi Dungey & Ms. Renee Fry, 2003. "Characterizing Global Investors' Risk Appetite for Emerging Market Debt During Financial Crises," IMF Working Papers 2003/251, International Monetary Fund.
    19. Claudio E. V. Borio, 2004. "Market distress and vanishing liquidity: anatomy and policy options," BIS Working Papers 158, Bank for International Settlements.
    20. Marc Boissaux & Jang Schiltz, 2010. "An Optimal Control Approach to Portfolio Optimisation with Conditioning Information," LSF Research Working Paper Series 10-09, Luxembourg School of Finance, University of Luxembourg.
    21. Riccardo Rebonato, 2006. "Forward-Rate Volatilities And The Swaption Matrix: Why Neither Time-Homogeneity Nor Time-Dependence Are Enough," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(05), pages 705-746.
    22. Mathieu Gatumel & Florian Ielpo, 2014. "Commodity Markets through the business cycle," Post-Print hal-01302479, HAL.

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    • G1 - Financial Economics - - General Financial Markets

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