Daily Global Investor Sentiment

Can a multifaceted measure of investor sentiment convincingly predict returns? In their November 2024 paper entitled “Risk-on/Risk-off: Measuring Shifts in Investor Sentiment”, flagged by a subscriber, Anusha Chari, Karlye Stedman and Christian Lundblad explore risk-on/risk-off (RORO) as the variation in global investor risk taking behavior. Their RORO index captures time-varying investor risk appetite as the first principle component of daily changes in proxies for four aspects of investor risk: (1) advanced economy credit risk; (2) advanced economy equity market volatility risk; (3) funding conditions (liquidity) risk; and, (4) currency/gold risk. The proxies are:

• Credit – change in the ICE BofA BBB Corporate Index Option-Adjusted Spreads for the U.S. and the Euro Area, plus the U.S. BAA corporate/10-year U.S. Treasury note yield spread.
• Equity volatility – additive inverse of total returns on the S&P 500, STOXX 600 and MSCI Advanced Economies indexes, plus associated changes in VIX and VSTOXX.
• Liquidity – average change in the G-spreads for 2-year, 5-year and 10-year U.S. Treasury notes, along with the change in the TED spread, the LIBOR-OIS spread, and the bid-ask spread on 3-month U.S. Treasury bills.
• Currency/gold – growth rate of the trade-weighted U.S. Dollar Index against currencies of other advanced economies and the change in gold price.

Using daily values of these proxies during mid-2003 through early 2024, they find that: (more…)