Working Paper: NBER ID: w31907
Authors: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
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: Global Investor Risk Aversion; Risk-On Risk-Off; RoRo Index; Investor Sentiment; Financial Markets
JEL Codes: F21; F31; F36; G11; G15; G17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RoRo index (C43) | asset prices (G19) |
| RoRo index (C43) | risk premia (G22) |
| risk sentiment (D81) | asset prices (G19) |
| risk sentiment (D81) | risk premia (G22) |
| risk aversion (D81) | equity fund outflows (G23) |
| RoRo index (C43) | investor behavior (G41) |
| RoRo index residual component (C29) | returns (Y60) |
| RoRo index (C43) | shifts in expectations about fundamentals (D84) |