Arrow_Blue_Orange.pngRisk-On/Risk-Off and the Schrödinger Quadrant


Creating a Market Sentiment indicator that provides an additional source of market timing information for existing investment strategies.

This paper provides an attempt to design a measure that quantifies the current balance between risk-tolerant and risk-averse investors in the equity markets. We will then define a buy or sell signal based on this measure and use it in a series of back-tests to validate its potential as a market-timing indicator.

The very same set of metrics we use during our quarterly Insight reports, with which our readers are familiar. The eight metrics in the indicator are all calculated using our standard fundamental multi-factor equity models for each respective market. From this list of indicators, we selected eight that we consider to be good descriptors of the risk-tolerance/aversion behavior we are trying to quantify. Since our intent is to develop a market-timing indicator that can be used as part of an investment strategy, we want to strike a balance between its timely responsiveness to sudden changes in the risk-tolerance/aversion level, but also be mindful of creating too much turnover from an overly sensitive signal.




Olivier-d'Assier-cir.png


Author: 
Olivier d’Assier
Applied Research APAC
Arrow_Blue_Orange.pngRisk-On/Risk-Off and the Schrödinger Quadrant



This paper provides an attempt to design a measure that quantifies the current balance between risk-tolerant and risk-averse investors in the equity markets. We will then define a buy or sell signal based on this measure and use it in a series of back-tests to validate its potential as a market-timing indicator.

The very same set of metrics we use during our quarterly Insight reports, with which our readers are familiar. The eight metrics in the indicator are all calculated using our standard fundamental multi-factor equity models for each respective market. From this list of indicators, we selected eight that we consider to be good descriptors of the risk-tolerance/aversion behavior we are trying to quantify. Since our intent is to develop a market-timing indicator that can be used as part of an investment strategy, we want to strike a balance between its timely responsiveness to sudden changes in the risk-tolerance/aversion level, but also be mindful of creating too much turnover from an overly sensitive signal.

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Author: 
Olivier d’Assier
Applied Research APAC