This paper proposes a new method for measuring investor ‘risk appetite’. Like other indicators in
the literature, it is based on a comparison of risk-neutral probabilities of future returns with the
corresponding subjective probabilities. The precise nature of the comparison is novel, however,
and involves comparing probabilities across the full range of potential returns. Unlike other
indicators, our measure of market sentiment distinguishes risk appetite from risk aversion, and is
reported in levels rather than changes. Implementation of the approach yields results that respond
to crises and other major economic events in a plausible manner.