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Measuring Investors' Risk Appetite

Author

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  • Gai, Prasanna
  • Vause, Nicholas

Abstract

This 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.

Suggested Citation

  • Gai, Prasanna & Vause, Nicholas, 2005. "Measuring Investors' Risk Appetite," MPRA Paper 818, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:818
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    References listed on IDEAS

    as
    1. Danthine, Jean-Pierre & Donaldson, John B., 2014. "Intermediate Financial Theory," Elsevier Monographs, Elsevier, edition 3, number 9780123865496.
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    4. 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.
    5. Bollerslev, Tim & Gibson, Michael & Zhou, Hao, 2011. "Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities," Journal of Econometrics, Elsevier, vol. 160(1), pages 235-245, January.
    6. 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.
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    More about this item

    Keywords

    Risk appetite; market sentiment; risk-neutral pricing; risk aversion;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G0 - Financial Economics - - General

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    This paper has been announced in the following NEP Reports:

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