The CAPM and the risk appetite index; theoretical differences and empirical similarities

Pericoli, Marcello; Sbracia, Massimo

The CAPM and the risk appetite index; theoretical differences and empirical similarities

Marcello Pericoli and Massimo Sbracia

No 586, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: 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.

Keywords: CAPM; risk aversion (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 06-0586/tema_586.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_586_06

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().