Risk Tolerance Analysis: Romanian Case before and during Financial Turmoil

By Cristian, Paun | Economics & Sociology, July 1, 2012 | Go to article overview

Risk Tolerance Analysis: Romanian Case before and during Financial Turmoil


Cristian, Paun, Economics & Sociology


ABSTRACT. One of the most challenging problems of investment theory is to explain and to understand the risk behaviour of people interested in investing their savings on the stock exchange. The recent global financial crisis significantly affected public perception about the risks and had a direct impact on the transaction volume and type of operations performed on international capital markets. Risk tolerance is considered in crisis theories as one of the major factors inducing global contagion. Social aspects like gender, social status, level of income (wealth) are considered to be relevant for explaining risk tolerance. This research proposed a specific instrument used to test the level of risk aversion (inverse of risk tolerance) applied on the Romanian case in two different periods (before crisis and during crisis) and on a statistically relevant sample of respondents. Using specific tools (non-parametric and parametric instruments), the paper provides a closer insight on this specific problem, trying to explain the significance of different social aspects on the risk aversion level for different categories, but also to explain how the crisis affected this aversion.

JEL Classification: A13, G12, D53, D81, G01

Keywords: risk aversion, behavioural finance, optimal portfolio investments, capital market, investment criteria

(ProQuest: ... denotes formulae omitted.)

Introduction

Risk attitude is important for explaining why a potential investor is interested or not to introduce money on capital markets and for determining the amount of money invested (if the decision will be in favour of investments). According with mainstream approach (the research was initiated by Pratt, 1964; Arrow, 1971; continued by Kihlstrom&Mirman, 1974 that studied the difficulties in defining comparative risk aversion of individuals facing with different preferences requiring a prioritization; followed recently by Borghans et al., 2009; Kraeussl, et al., 2010 and Ruble, 2011), the investors could adopt three different attitudes toward investment risk: aversion, indifference and preference. Different utility functions are associated to expected returns (using probabilities), in order to explain these attitudes (risk aversion meaning that the investors will associate a higher utility to the possibility of losing money from a risky investment alternative compared with those investors that prefer the risk and therefore they associate a higher utility for potential gains than potential losses). There are families of utility functions proposed for describing such behaviours: logarithmic functions are used for describing risk aversion investors, linear functions for risk indifferent individuals and exponential functions for risk preferring investors (Wakker, 2008; Würth& Schumacher, 2011). These utility functions of investors' wealth are used to estimate the parameter of absolute risk aversion (ARA) and relative risk aversion (RRA). Absolute risk aversion is determined by the absolute amount of investor's income that she / he agrees to invest in a risky alternative and this absolute risk aversion is dependent on the changes in the income level - a decreasing absolute risk aversion means that the investor will increase the amount of money invested when his income will be higher, while an increasing absolute risk aversion means that the invested amount of money will be lower when the incomes will increase (there is also a constant absolute risk aversion reflecting no link between the increase of investor's wealth and the amount of money invested on the market). Comparatively, relative risk aversion expresses the willingness of an individual to invest his money in a risky alternative as a function of weight of the total wealth of this individual that is allocated in risky assets. A decreasing relative risk aversion means that an increase in the investor's income level will increase the weight of his wealth allocated in risky alternatives (or assets). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Risk Tolerance Analysis: Romanian Case before and during Financial Turmoil
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.