Measuring Investors' Risk Appetite
by Prasanna Gai and Nicholas Vause
Bank of England
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.
JEL Codes: G10, G12, G13.
Full article (PDF, 22 pages 268 kb)