Gambling, Risk Appetite and Asset Pricing
49 Pages Posted: 30 Nov 2017
Date Written: November 27, 2017
A measure of the propensity to gamble in casinos provides relevant information for asset pricing. This simple measure of risk appetite, which is independent of market prices and trading activity, explains cross-sectional differences in future returns for portfolios sorted on various characteristics. Our measure improves the fit of conditional asset pricing models such as the conditional CAPM, and also helps forecast market and portfolio excess returns out of sample. The relation between risk appetite and asset prices appears to be mainly explained by simultaneous changes in risk and risk premium, but our results suggest that investor sentiment may also play a role.
Keywords: Asset Pricing, Cross-Section, Predictability, Factors, CAPM, Conditional Model, Gambling, Casino
JEL Classification: G12, G02
Suggested Citation: Suggested Citation