Risk appetite

[ravi_theja_k]

For measuring risk appetite and risk aversion, VIX & risk appetite index can be used, how are debt yields used to gauge the risk appetite of a country, any explanation or references are welcome?


Are there any other measurements/formulas to gauge risk aversion or risk appetite of a country

Thank you.

 

[ShaktiRathore]

Hi,
Riskiness of a country bond or debt is determined by the credit spread offered by its debt being raised. A bond yield-country risk free rate(10 yr govt bond rate) would approximately gives you the credit spread of the country bond. A higher spread implies a greater risk of default or higher risk for the country. you can gauge this riskiness of the country by taking various values of LGD and thus obtain PD=credit spread/LGD also LGD=1-RR recovery rate. The probability of default of the country can be assessed through this method.
You can also use regression e.g. logistic regression to find riskiness of country by including various variables like debt/GDP, country's budget deficit, trade surplus etc.
The ratings of govt bonds issues can help you asses the riskiness very better is the easiest method. For e.g. AAA-BBB is investment grade while thereafter speculative and default grade. The ratings can provide important information to assess the risk appetite. Run a regression of country's ratings versus a bond yield of sample of countries and find regression model. Now for country assess yield based on the rating by inputting the rating of country into the model ,a higher yield implies a high risk and lower yield implies a lower risk.

thanks

 

[ravi_theja_k]

Thanks for the explanation, it helped a lot...

To find the risk appetite of a country in an intermediate time frame Credit ratings, GDP and Balance of Payments are useful.

But, according to the tone of the report which i have shown below, for 'real time' Risk appetite how are they dependent on equities, USD/Asia and regional sovereign debt yields ?

Thank you.

Report - Risk appetite Holds Firm Despite Partial US Shutdown
Risk appetite remained firm overnight, notes Barclays, despite Congress failing to avoid the first partial shutdown of the U.S. Government in 17 years. 'Risk appetite held up well in the Asia session in the run-up to the midnight ET deadline, with equities bid, USD/Asia lower, regional sovereign debt yields higher. These trends continued after the deadline passed, with risk appetite well supported,' says Barclays. 10 year US Treasury's yields are little changed at 2.635%.

 

[ShaktiRathore]

HI risk appetite here means the ability to held up with risk. THe risk has increased due to some shutdown of US govt looks like crisis situation and the Barclays Bank risk exposure that is risk appetite to asian markets have remain the same even in this crisis. The equities bid are still there from barclays side for asia markets and the bank have exposure to highly risky sovereign debt yields with higher yield in these markets tends to show that their risk appetite for the asian markets have remained the same despite the crisis like situation in US.
Willingness to take risk have not decline from barclays side and there is no relation of this appetite with the yield of bond, appetite depends on banks if they are willing to invest even in this crisis situation in these markets.
thanks

 

[ravi_theja_k]

Thanks for the explanation.