Gambling, Risk Appetite and Asset Pricing
51 Pages Posted: 30 Nov 2017 Last revised: 1 Feb 2018
Date Written: January 1, 2018
A measure of the propensity to gamble in casinos constructed without any asset price data provides relevant information for asset pricing. This measure of risk appetite improves the fit of conditional asset pricing models such as the conditional CAPM, explains cross-sectional differences in future returns for portfolios sorted on various characteristics, and helps forecast market and portfolio excess returns out of sample. The relationship between risk appetite and asset prices appears to be mainly explained by simultaneous changes in risk and risk premia, but some results suggest that our measure may also capture changes in investor sentiment.
Keywords: Asset Pricing, Cross-Section, Predictability, Factors, CAPM, Conditional Model, Gambling, Casino
JEL Classification: G12, G02
Suggested Citation: Suggested Citation