Pure Contagion and Investors Shifting Risk Appetite: Analytical Issues and Empirical Evidence

Manmohan Kumar and Avinash Persaud

No 2001/134, IMF Working Papers from International Monetary Fund

Abstract: This paper discusses a "pure" form of financial contagion, unrelated to economic fundamentals - investors' shifting appetite for risk. It provides an analytical framework for identifying changes in investors' risk appetite and discusses whether it is possible to directly measure them in a way that can enable policy makers to differentiate between financial contagion and domestic fundamentals as the immediate source of a crisis. Daily measures of risk appetite are computed and their usefulness in predicting financial crises is assessed.

Keywords: WP; risk appetite; risk; appetite index; Risk aversion; contagion affects; financial crises; investor risk preference; excess return; risk appetite measure; Hong Kong dollar; bear risk; investor behaviour; yen return; risk-appetite measure; risk-loving return; New Zealand dollar; Mexican peso; Currencies; Systemic crises; Yield curve; Currency markets; Global (search for similar items in EconPapers)
Pages: 35
Date: 2001-09-01
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Citations: View citations in EconPapers (54)

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