Risk-On Risk-Off: A Multifaceted Approach to Measuring Global Investor Risk Aversion

Anusha Chari, Karlye Dilts Stedman and Christian Lundblad

No 31907, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper defines risk-on risk-off (RORO), an elusive terminology in pervasive use, as the variation in global investor risk aversion. Our high-frequency RORO index captures time-varying investor risk appetite across multiple dimensions: advanced economy credit risk, equity market volatility, funding conditions, and currency dynamics. The index exhibits risk-off skewness and pronounced fat tails, suggesting its amplifying potential for extreme, destabilizing events. Compared with the conventional VIX measure, the RORO index reflects the multifaceted nature of risk, underscoring the diverse provenance of investor risk sentiment. Practical applications of the RORO index highlight its significance for international portfolio reallocation and return predictability.

JEL-codes: F21 F31 F36 G11 G15 G17 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-ifn, nep-opm, nep-rmg and nep-upt
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