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

24 Pages Posted: 30 Nov 2023

See all articles by Anusha Chari

Anusha Chari

University of North Carolina (UNC) at Chapel Hill; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Karlye Dilts Stedman

Federal Reserve Bank of Kansas City

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Multiple version iconThere are 2 versions of this paper

Date Written: November 16, 2023

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.

Keywords: Risk-on Risk-off, Global Investor Risk Aversion, Extreme Events, Tail Risk, Portfolio Reallocation, Return Predictability.

JEL Classification: G17, G20, G01, F21, F31, F36

Suggested Citation

Chari, Anusha and Dilts Stedman, Karlye and Lundblad, Christian T., Risk-On Risk-Off: A Multifaceted Approach to Measuring Global Investor Risk Aversion (November 16, 2023). Available at SSRN: https://ssrn.com/abstract=4637262 or http://dx.doi.org/10.2139/ssrn.4637262

Anusha Chari

University of North Carolina (UNC) at Chapel Hill ( email )

Chapel Hill, NC 27599
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Karlye Dilts Stedman

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Christian T. Lundblad (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

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