RWP 24-12, November 2024
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.
JEL Classifications: F21, F36, F65, G11, G12, G15, G23
Article Citation
Chari, Anusha, Karlye Dilts Stedman, and Christian Lundblad. “Risk-on / Risk-off: Measuring Shifts in Investor Sentiment.” Federal Reserve Bank of Kansas City, Research Working Paper no. 24-12, November. Available at External Linkhttps://doi.org/10.18651/RWP2024-12