Thesis advisor: Harold Petersen / Minsky developed a Financial Instability Hypothesis which sought to find an endogenous explanation for a modern economy’s vulnerability to crashes. Specifically, he investigated the ways in which the financial structures of a modern economy might contribute to its instability. The hypothesis rests upon the twin assertions that some financial arrangements are more dangerous than others, and that during economic booms, investors’ incentives are altered to favor these more dangerous arrangements. Essentially, in good times, the profit-seeking motive of investors overrides a diminished risk aversion, as memories of losses fade into the past. This paper empirically tests Minsky’s second assertion, by using econometric techniques to analyze the relationship between risk appetite and market returns. Spreads between the yields of bonds of different credit qualities are used as a proxy for wider investor sentiment toward risk. Regressions demonstrate that changes in risk appetite can be explained at least in part by historical market returns. Such a finding supports Minsky’s proposal that incentives of investors change in response to varying market conditions. It further implies that regulatory authorities might examine the level of risk appetite to determine whether increases in asset prices indicate the formation of speculative bubbles or are rather reflecting developments in the fundamentals underlying said assets. / Thesis (BA) — Boston College, 2010. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Economics Honors Program. / Discipline: College Honors Program. / Discipline: Economics.
| Identifer | oai:union.ndltd.org:BOSTON/oai:dlib.bc.edu:bc-ir_102205 |
| Date | January 2010 |
| Creators | Steck, Andrew L. |
| Publisher | Boston College |
| Source Sets | Boston College |
| Language | English |
| Detected Language | English |
| Type | Text, thesis |
| Format | electronic, application/pdf |
| Rights | Copyright is held by the author, with all rights reserved, unless otherwise noted. |
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