Measuring Investors' Risk Appetite

Gai, Prasanna and Vause, Nicholas (2005): Measuring Investors' Risk Appetite. Published in: International Journal of Central Banking , Vol. Volume, No. Number 1 (8 March 2006): pp. 167-188.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Risk appetite; market sentiment; risk-neutral pricing; risk aversion
• Subjects: G - Financial Economics > G0 - General > G00 - General; G - Financial Economics > G0 - General

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