Risk-on/Risk-off: Measuring Shifts in Investor Sentiment

28 Pages Posted: 3 Dec 2024

See all articles by Anusha Chari

Anusha Chari

University of North Carolina (UNC) at Chapel Hill - Department of Economics; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School; 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

Date Written: November 21, 2024

Abstract

This paper defines risk-on risk-off (RORO), an elusive terminology in pervasive use, as the variation in global investor risk taking behavior. 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 ubiquitous VIX measure, the RORO index reflects the multifaceted nature of risk, underscoring the diverse provenance of investor behavior. Practical applications of the RORO index highlight its valuable role in understanding international portfolio reallocation and return predictability.

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

JEL Classification: F36, F65, G11, G12, G15, G23

Suggested Citation

Chari, Anusha and Dilts Stedman, Karlye and Lundblad, Christian T., Risk-on/Risk-off: Measuring Shifts in Investor Sentiment (November 21, 2024). Federal Reserve Bank of Kansas City Working Paper No. RWP24-12, Available at SSRN: https://ssrn.com/abstract=5042879 or http://dx.doi.org/10.2139/ssrn.5042879

Anusha Chari (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

McColl Building
Chapel Hill, NC 27599-3490
United States

Centre for Economic Policy Research (CEPR) ( email )

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

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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