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Gambling, Risk Appetite and Asset Pricing

49 Pages Posted: 30 Nov 2017  

Carlos Carvalho

Central Bank of Brazil; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Daniel Cordeiro

XP investimentos

Ruy Ribeiro

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Eduardo Zilberman

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Date Written: November 27, 2017

Abstract

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

Carvalho, Carlos and Cordeiro, Daniel and Ribeiro, Ruy and Zilberman, Eduardo, Gambling, Risk Appetite and Asset Pricing (November 27, 2017). Available at SSRN: https://ssrn.com/abstract=3077859

Carlos Carvalho

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Daniel Cordeiro

XP investimentos ( email )

Av. Brigadeiro Faria Lima 3600, 10º andar
São Paulo, São Paulo 04538-132
Brazil

Ruy Ribeiro (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Eduardo Zilberman

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

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