Financial markets’ appetite for risk –and the challenge of assessing itsevolution by risk appetite indicators

Assessments of investors’ risk appetite/aversion stance via indicators often yields resultswhich seem unsatisfactory (see e.g. Illing and Aaron (2005)). Understanding howsuch indicators work therefore seems essential for further improvements. The presentpaper seeks to contribute to this evolution, focusing on the “Global Risk Appetite Index”(GRAI) class of indicators going back to Kumar and Persaud (2002). Looking at internationalstock indices during the subprime crisis in 2007, the plausibility of the GRAIsbenefits from applying the rank correlation approach of Kumar and Persaud (2002)combined with a modified version of the factor-transformation extension proposed byMisina (2006).[...]