The CAPM and the risk appetite index; theoretical differences and empirical similarities
This paper analyzes the Risk Appetite Index (RAI), a measure of investorsï¿½ risk aversion proposed by Kumar and Persaud (2001, 2002). We show that the RAI distinguishes between risk and risk aversion only under theoretically restrictive assumptions on the distribution of returns and the shocks affecting assetsï¿½ riskiness. However, by comparing the RAI with a measure of risk aversion derived from the CAPM ï¿½ a model that does not require those restrictive assumptions ï¿½ we find that estimates are surprisingly similar. We explain this result by proving that, under a certain condition, the RAI can approximate the risk aversion parameter of a CAPM. This occurs if the ratio between the variance of the returns on assets and the variance of the riskiness of assets is sufficiently smallï¿½a condition that is met in our sample.
|Date of creation:||Mar 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Via Nazionale, 91 - 00184 Roma|
Web page: http://www.bancaditalia.it
More information through EDIRC
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.:
- Stambaugh, Robert F., 1982.
"On the exclusion of assets from tests of the two-parameter model : A sensitivity analysis,"
Journal of Financial Economics,
Elsevier, vol. 10(3), pages 237-268, November.
- Robert Stambaugh, . "On the Exclusion of Assets from Tests of the Two-Parameter Model: A Sensitivity Analysis," Rodney L. White Center for Financial Research Working Papers 13-81, Wharton School Rodney L. White Center for Financial Research.
- Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
- Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
- Schwert, G. William, 1983. "Size and stock returns, and other empirical regularities," Journal of Financial Economics, Elsevier, vol. 12(1), pages 3-12, June.
- Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
- Miroslav Misina, 2003.
"What Does the Risk-Appetite Index Measure?,"
Staff Working Papers
03-23, Bank of Canada.
- 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 401-36, Winter.
- Miroslav Misina, 2006. "Benchmark Index of Risk Appetite," Staff Working Papers 06-16, Bank of Canada.
- repec:ebl:ecbull:v:28:y:2003:i:6:p:a6 is not listed on IDEAS
- Manmohan S. Kumar & Avinash Persaud, 2001. "Pure Contagion and Investors Shifting Risk Appetite; Analytical Issues and Empirical Evidence," IMF Working Papers 01/134, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_586_06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.