Investigating the impact of risk appetite on stock returns

Forecasting stock returns is one of the most investigated issues in finance literature. There are various studies investigating the behavior of investors in the market and their relationship with stock returns within the framework of behavioral finance. Investor sentiment is one of the fundamental psychological factors influencing investors' decision-making and risk appetite. In this study, risk appetite is employed as a proxy of investor sentiment. The aim of investors is to increase total return by taking risk into consideration. Risk appetite, which has been accepted as a determinant of performance of international financial markets, can be defined as the amount of risk that investors are willing to take. The aim of this study is to determine whether there is a relationship between the risk appetite index -which is calculated in Turkey from December 2008 as an indicator of risk- in financial markets and stock returns. For domestic investors, RISE calculated by the change method is used as the independent variable and change in BIST 100 index is included as the second explanatory variable in the model. The stocks traded on the stock market in the January 2009 - January 2019 period are ranked according to their market values and a portfolio is formed from the stocks with the lowest market value of 10%. The effect of risk appetite on stock returns was analyzed by multiple regression model. Findings suggest that there ise a limited impact of risk appetite on stock returns.